- Gold price has fallen almost a percentage point lower on the back of improving risk sentiment.
- Positive gains in Asia, strong US earnings, and robust European GDP data have all helped boost sentiment.
- Gold price may be unfolding a Measured Move price pattern lower on the charts.
The Gold price (XAU/USD) trades lower by one percent on Tuesday, in the $2,310s at the time of writing, as a positive market mood dents safe-haven demand for the precious metal.
Markets in Asia-Pacific closed on the whole in positive territory, with the Nikkie posting a 1.24% gain, Australia’s ASX200 up 0.35%, and the Hang Seng rising 0.1% at the close.
Although stock markets on mainland China edged lower to close in negative territory, this may have been on the back of traders booking profits ahead of the May 1 holiday after a run of up days. Indeed data out of China was on the whole positive, showing that the Caixin Chinese Manufacturing PMI hit a 14-month high in April, whilst in Europe, French and Spanish GDP growth beat estimates in the first quarter.
Gold price rally driven by Central Banks and OTC buying – World Gold Council
The Gold price rally in Q1 was driven by a combination of strong central bank and OTC buying, according to a recent report by the World Gold Council (WGC).
Total demand during the period was estimated at 1,238.3 tonnes compared to 1,269.7t in the previous quarter.
Over-the-Counter, or OTC buying – which is not conducted via exchanges and so can only be estimated – rose by 136.4t compared to 126.9t in Q4.
Heavy buying by central banks was a contributing factor in the rally in Gold price, with 289.7t of Gold bought by this market compared to 219.6t in the previous quarter.
“Q1 saw no let-up in the pace of central bank gold buying: 290t (net) was added to official holdings,” said the report.
Further details from the WGC report are as follows:
- Gold mine production increased 4.0% YoY to 893t – a record first quarter for the WGC data series.
- Gold recycling climbed 12% YoY to 351t, the highest quarter since Q3 of 2020.
- Eastern investors exhibited different behavior to Western investors, whilst Western gold buying experienced healthy levels of profit-taking. “This contrasted with strong buying into the price surge in Eastern markets,” said the WGC report.
- Global Gold ETF holdings fell by 114t, with Europe and North America experiencing quarterly outflows.
- Demand from the jewelry sector remained healthy, given the price rally. Global jewelry consumption fell just 2.0%.
- Gold demand from the technology sector rose 10.0% YoY as the AI boom boosted buying from the tech sector.
Technical Analysis: Gold price possibly unfolding Measured Move
Gold price (XAU/USD) is potentially unfolding the final down wave of a Measured Move price pattern, most clearly visible on the 4-hour chart, which technical analysts use to analyze the short-term trend.
XAU/USD 4-hour Chart
Measured Move patterns are composed of three waves that trace out a zig-zag pattern. The waves are often labeled A, B, and C. The end of the final C wave can be estimated based on the length of wave A. It is usually either equal in length to A or a Fibonacci 0.681 ratio of A.
A break below $2,290, however, would confirm the pattern is a Measured Move and lead to more downside as wave C unfolds, with targets at $2,267 (the 0.681 target) and $2,245 (A=C).
The Moving Average Convergence Divergence (MACD) momentum indicator has started printing bearish red histogram bars and has crossed below its signal line lending the chart a negative tone.
Until the pattern is confirmed, however, there is still a chance Gold price could rally. A break above the cluster of Moving Averages and the peak of wave B at $2,350 would potentially usher in a new more bullish environment. This could then see a retest of the $2,400 highs.
Additionally, the trend for Gold price is up both in the medium and long-term, overall supporting the outlook for bulls.
Risk sentiment FAQs
In the world of financial jargon, the terms “risk-on” and “risk off” are widely used to refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market, investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc, and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. Investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY), and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds because a high proportion is held by domestic investors unlikely to dump them even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
