Gold price recovers as US-Iran draft deal undermines Oil and USD
- US-Iran draft deal hopes drag WTI lower, easing inflation fears.
- US PMIs strengthen, but Dollar pares gains after headlines.
- Fed minutes leave rate-hike risk alive if inflation persists.
Gold (XAU/USD) price recovers during the mid-North American session on Thursday after Al Arabiya reported that a final draft of a US-Iran agreement has been reached by the Pakistani mediator and is scheduled to be announced within a few hours. At the time of writing, the XAU/USD pair trades at $4,538, virtually unchanged.
XAU/USD steadies as ceasefire hopes offset hawkish Fed signals
According to the draft revealed by Iran’s ILNAs news agency, it includes an immediate and comprehensive ceasefire across all fronts, with both sides pledging to refrain from targeting each other's infrastructure. Furthermore, the agreement will allow freedom of navigation through the Persian Gulf and the Strait of Hormuz, lift US sanctions on Iran, and begin negotiations on outstanding issues within seven days at the latest.
Earlier, reports emerged that Iran’s supreme leader had issued a directive barring enriched uranium from being shipped abroad. However, Al Jazeera later denied that such directive had been issued.
Oil prices plunged sharply, with West Texas Intermediate (WTI) falling over 2% to below $97.50 after the draft news. The Greenback paired its earlier gains as the US Dollar Index (DXY) is almost unchanged at 99.13.
Macroeconomics-wise, US Initial Jobless Claims for the week ending May 16 fell to 209K from 212K, coming in below the 210K forecast. S&P Global also reported stronger US manufacturing activity in May, with the index reaching a four-year high. The Manufacturing PMI increased from 54.5 in April to 55.3, as businesses built up inventories to guard against potential shortages and higher prices.
On Wednesday, the Fed’s last meeting minutes showed a division among the board, with most members opting to keep rates unchanged or eyeing a rate hike if the energy supply shock from the Iran war persists.
Recently, Richmond Fed President Thomas Barkin said he’s nervous about the tails “on both sides of the mandate.” He remains neutral as he stated that he’s not leaning towards one side of the central bank’s dual mandate and added that “policy is in a good place to respond to ongoing shocks.”
Chicago’s Fed Austan Goolsbee was hawkish on an interview on WBEZ Chicago radio, saying that he is “attuned on this inflation side, because we were making progress, then we stopped making progress.”
Ahead, the US economic docket will feature the University of Michigan Consumer Sentiment and the swearing-in of the new Fed Chair, Kevin Warsh.
XAU/USD technical outlook: Gold extends consolidation as sellers eye $4,500
From a technical standpoint, Gold is poised to extend its ongoing downtrend, unless buyers drive XAU’s spot price back above the May 12 swing high of $4,773.
So far, momentum, as depicted by the Relative Strength Index (RSI), remains bearish, flat below the 50-neutral level, indicating consolidation around current price levels.
For a bearish continuation, Gold must drop below the May 20 swing low of $4,453. Once hurdled, the next stop would be the $4,400 psychological level ahead of the 200-day Simple Moving Average (SMA) at $4,346.
Conversely, if XAU/USD climbs above a downslope resistance trendline around $4,590, it would open the door to testing $4,600. On further strength, the next stop would be the 20-day SMA at $4,619, followed by the 50-day SMA at $4,678.
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 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.
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