Gold retakes $4,200 as USD weakens on economic concerns, risk-off mood boost demand
- Gold regains positive traction on Friday following the overnight pullback from a three-week high.
- Economic concerns weigh on the USD and support the XAU/USD pair amid the risk-off impulse.
- Reduced bets for a December Fed rate cut might keep a lid on further gains for the yellow metal.
Gold (XAU/USD) attracts some dip-buyers during the Asian session on Friday and climbs back above the $4,200 mark, closer to an over three-week high that was touched the previous day. Investors seem concerned about weakening economic momentum on the back of a prolonged US government shutdown, which could allow the US Federal Reserve (Fed) to cut interest rates further. This keeps the US Dollar (USD) depressed near a two-week low and turns out to be a key factor acting as a tailwind for the precious metal.
Furthermore, a turnaround in the global risk sentiment is evident from a generally weaker tone around the equity markets and underpins the safe-haven Gold. Meanwhile, a growing number of Federal Reserve policymakers signaled caution on further easing amid the lack of economic data, prompting traders to trim their bets for another rate cut in December. This, in turn, might keep a lid on the non-yielding yellow metal. Nevertheless, the fundamental backdrop seems tilted firmly in favor of the XAU/USD bulls.
Daily Digest Market Movers: Gold draws support from sustained USD selling and reviving safe-haven demand
The reopening of the US government shifts market focus back to the deteriorating fiscal outlook. Moreover, market participants now seem convinced that the delayed US macro data will show some weakness in the economy and back the case for further policy easing by the US Federal Reserve.
Economists estimate that the prolonged government closure might have already shaved approximately 1.5 to 2.0% off quarterly GDP growth. This comes amid signs of deteriorating labor market conditions and fails to assist the US Dollar to register any recovery from a two-week trough.
Meanwhile, a senior White House official said that key economic reports for October – employment details and inflation data – may not be released at all. This prompted several Fed officials to signal caution on further easing, forcing investors to trim their bets for a rate cut in December.
Minneapolis Fed President Neel Kashkari said the economic outlook is mixed as inflation continues to run higher. Separately, Boston Fed President Susan Collins said that given the limited information on inflation due to the government shutdown, she would be hesitant to ease policy further.
According to the CME Group's FedWatch Tool, traders are still pricing in a 50% possibility that the US central bank will lower borrowing costs by 25 basis points in December. Moreover, the probability of a rate reduction in January currently stands at over 75%, favoring the XAU/USD bulls.
Traders might continue to scrutinize comments from influential FOMC members for more cues about the Fed's rate-cut path. This, in turn, will drive the USD demand and provide some impetus to the non-yielding yellow metal, which seems poised to register strong weekly gains.
Gold could climb beyond the overnight swing high, around $4,145, bullish technical setup
This week's breakout through the $4,150 horizontal barrier and a subsequent move beyond the $4,200 mark was seen as key trigger for the XAU/USD bulls. Moreover, oscillators on daily/4-hour chart have been gaining positive traction, suggesting that the path of least resistance for the Gold price is to the upside. Any further move higher, however, might face some hurdle near the overnight swing high, around the $4,245 region, above which the commodity could aim to reclaim the $4,300 round figure.
On the flip side, the overnight swing low, around the $4,145 region, now seems to protect the immediate downside, below which the Gold price could accelerate the fall to the $4,100 mark en route to the $4,075 zone. Some follow-through selling could expose the $4,025 intermediate support before the commodity eventually drops to the $4,000 psychological mark. The latter is likely to act as a key pivotal point, which, if broken decisively, might shift the near-term bias in favor of bearish traders.
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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