Gold prices benefit from increased geopolitical risk and lack of follow-on buying.
- Gold prices gained positive traction again in response to Iran’s attack on Israel last weekend.
- Amid hawkish Federal Reserve expectations and USD strength, upside remains limited.
- U.S. retail sales and the Empire State manufacturing index are eyeing near-term stimulus.
Gold prices (XAU/USD) saw some dip buying on the first day of the new week and halted a retracement slide from new all-time highs near $2,431-2,432 touched on Friday. Iran’s attacks on Israel last weekend sparked fears of further escalation of conflict in the Middle East, which in turn benefited the precious metal, which has traditionally been a safe haven. In addition to this, the decline in the price of the United States Dollar (USD) is also seen as another factor supporting the commodity to some extent.
Meanwhile, the USD decline is still moderating due to expectations that the Federal Reserve (Fed) may postpone interest rate cuts as inflation still persists in the United States. The hawkish outlook should continue to push U.S. Treasury yields higher, which should continue to act as a tailwind for the dollar and limit further gains for non-yielding gold prices. Traders now look to US macro data and Fedspeak for some stimulus later in the North American session.
Daily Digest Market leaders: Gold prices get support from geopolitical risks. Hawkish Fed expectations cap rises
- Iran’s unprecedented direct attack on Israeli territory raised the threat of a wider regional conflict in the Middle East, which in turn helped safe-haven gold prices regain positive traction on Monday.
- While Israeli officials favor retaliation, the United States has said it will not engage in any aggressive action against Iran, limiting the immediate market reaction and limiting further gains for XAU/USD.
- Investors have pushed back expectations for the Federal Reserve’s first interest rate cut from June to September after stronger-than-expected U.S. consumer inflation figures were released last week.
- Moreover, traders are pricing in the possibility of less than two interest rate cuts from the Federal Reserve in 2024 compared to the three expected, which could push the greenback close to its highest level since early November.
- The Fed’s hawkish outlook along with USD strength could discourage aggressive bets on precious metals ahead of US data (retail sales and Empire State Manufacturing Index).
Technical Analysis: A break in the horizontal support at $2,334-2,332 could extend gold prices’ corrective slide from all-time highs.
From a technical perspective, the Relative Strength Index (RSI) on the daily chart remains in overbought territory despite a high level of easing. Therefore, any subsequent move beyond the Asian session highs around $2,371-$2,372 is more likely to face strong resistance and remain near the $2,400 level. However, subsequent gains are likely to push gold prices back to record highs near the $2,431-2,432 region touched last Friday.
On the other hand, the $2,334-2,332 horizontal zone is likely to protect the immediate downside and could allow gold prices to extend a corrective decline towards the $2,300 round figure. Some subsequent selling suggests that the precious metal has hit near-term highs and found intermediate support near the $2,250 region, setting the stage for a meaningful depreciating move towards the $2,220 region.
Gold FAQ
Gold has played an important role in human history, being widely used as a store of value and medium of exchange. Nowadays, in addition to being polished and used as jewelry, precious metals are widely viewed as safe assets and are considered good investments during turbulent times. Gold is also widely known as a hedge against inflation and currency depreciation because it is not dependent on a specific issuer or government.
Central banks are the largest holders of gold. With the aim of supporting their currencies during times of turmoil, central banks tend to diversify their reserves and purchase gold to improve the strength of their economy and currency. High gold reserves can be a source of confidence in a country’s solvency. Central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks in emerging economies such as China, India and Türkiye are rapidly increasing their gold reserves.
Gold has an inverse correlation with the US dollar and US Treasury bonds, which are major reserve and safe haven assets. When the dollar falls, gold prices tend to rise, allowing investors and central banks to diversify their holdings during turbulent times. Gold also has an inverse correlation with risky assets. Rising stock markets tend to weaken gold prices, while sell-offs in riskier markets tend to favor the precious metal.
Prices may fluctuate due to a variety of factors. Fears of geopolitical instability or a severe recession could cause gold prices to rise quickly due to its safe haven status. Gold, a non-yielding asset, tends to appreciate when interest rates are low, while higher money costs generally weigh on the yellow metal. Nonetheless, most of the movement will depend on how the US dollar (USD) behaves when the asset is priced in dollars (XAU/USD). A stronger dollar tends to keep gold prices in check, while a weaker dollar is likely to push gold prices higher.
Source: https://www.fxstreet.com/news/gold-price-benefits-from-rising-geopolitical-risks-lacks-follow-through-buying-202404150418
