- Gold price exhibits strength as geopolitical tensions keep safe-haven demand firm.
- The US Dollar corrects amid fears that inflation will remain stubborn in other developed nations.
- Fed Mester is confident about policy normalization but cautioned that it should not be done in a hurry.
Gold price (XAU/USD) rebounds to $2,380 in Thursday’s European session after posting losses on Wednesday. The precious metal holds gains amid fears that Middle East tensions could worsen and spread beyond Gaza if Israel responds brutally to Iran.
According to The Times, Israel’s Prime Minister Benjamin Netanyahu has clarified that “their state will do everything necessary to defend itself,” according to The Times. The comments from PM Netanyahu came after his conversation with foreign ministers from the United Kingdom and Germany.
The recovery in Gold is also driven by a decline in US Treasury yields, which are influenced by the Federal Reserve’s (Fed) interest rate outlook. 10-year US bond yields edge down to 4.57% from a more than five-month high of 4.70%. Lower yields on interest-bearing assets diminish the cost of holding non-yielding assets such as Gold.
Daily digest market movers: Gold price reverses Wednesday’s losses
- Gold price recovers the majority of Wednesday’s losses and rises higher to $2,380 as investors remain worried about geopolitical tensions. Traders continue to hedge for Gold amid fears that Israel could retaliate to Iran’s attack on their territory in which the Iranian military launched hundreds of drones and missiles.
- A correction in the US Dollar also supports the precious metal. The five-day winning streak in the US Dollar has been halted as traders expect that other central banks from developed nations will also delay their rate cut plans due to persistent price pressures. The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, falls sharply to 105.75. Generally, the appeal of dollar-denominated Gold improves amid a soft US Dollar.
- The near-term demand for the US Dollar remains firm as Federal Reserve (Fed) policymakers see interest rates remaining higher for a longer period until they get convincing data that inflation will return sustainably to the desired rate of 2%.
- On Tuesday, Fed Chair Jerome Powell said recent data has clearly not given policymakers confidence that they should start considering rate cuts. Instead, interest rates need to remain higher for longer than expected to gain that confidence.
- On Wednesday, Cleveland Fed Bank President Loretta Mester also argued for keeping the monetary policy framework restrictive. Mester remained optimistic that the Fed will eventually gain the confidence to lower interest rates and start normalizing policy again, but that shouldn’t be done quickly.
Technical Analysis: Gold price rebounds to $2,380
Gold price advances to $2,380 in Thursday’s London session after edging down on Wednesday. The precious metal remains inside the $2,350-2,400 trading range from the last two trading sessions. The upside in the precious metal remains limited as momentum oscillators are cooling down after turning extremely overbought. The 14-period Relative Strength Index (RSI) on the daily chart drops slightly after peaking around 85.00. The broader-term demand is intact as the RSI remains in the bullish range of 60.00-80.00.
On the downside, April 5 low near $2,268 and March 21 high at $2,223 will be major support areas for the Gold price.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India, and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while a higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
Insight:
– Geopolitical tensions, especially in the Middle East, play a significant role in driving up Gold prices as investors seek safe-haven assets during uncertain times.
– The inverse correlation between Gold and the US Dollar, as well as US Treasuries, makes Gold an attractive option for diversification during market volatility.
– Central banks’ increasing Gold reserves indicate a continued demand for the precious metal as a means to bolster economies in times of economic uncertainty.
