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    Gold price advances as Middle East tensions escalate, Fed policy in spotlight

    Source Fxstreet
    Jan 30, 2024 10:21
    • Gold price jumps further on deepening Middle East tensions.
    • Investors brace for Fed policy decision and US labor and Manufacturing PMI data.
    • Fed’s outlook on interest rates will be in focus.

    Gold price (XAU/USD) continues to advance amid the escalating Middle East crisis as US President Joe Biden has pledged to retaliate for unmanned aerial drone attacks on US service personnel near northeastern Jordan, near the Syrian border. Still, the precious metal could turn sideways as investors await the interest rate decision by the Federal Reserve (Fed), which will be announced on Wednesday.

    Traders see the Fed holding interest rates in the range of 5.25%-5.50% amid consistently easing price pressures. Investors will focus on the timing at which Fed policymakers are comfortable for commencing the rate-cut campaign. The Fed is not confident yet that underlying inflation will sustainably return to 2% due to strong labor demand, robust Retail Sales, and a broadly upbeat economic outlook.

    This week, investors will remain busy as various economic indicators from the US are lined-up for release. The ADP Employment Change will be released on Wednesday, just before the Fed’s policy announcement. These will be followed by the Institute for Supply Management (ISM) Manufacturing PMI on Thursday and Nonfarm Payrolls (NFP) data on Friday.

    Daily digest market movers: Gold price strengthens as appeal for safe-haven assets improves

    • Gold price prints a fresh weekly high near $2,040 due to deepening Middle East tensions.
    • US President Joe Biden vowed to retaliate for attacking their forces near northeastern Jordan while Iran denies claims of their involvement in these aerial drone attacks.
    • Escalating geopolitical tensions have significantly improved the appeal for safe-haven assets, while risk-perceived assets have been hit hard.
    • Meanwhile, forward action on the Gold price will be guided by the Federal Reserve’s monetary policy decision, which will be announced on Wednesday.
    • The Fed is expected to hold interest rates steady in the range of 5.25%-5.50% for the fourth straight time as price pressures are consistently declining. However, Fed policymakers are still not convinced that inflation will return to the 2% target in a sustainable manner.
    • Fed policymakers have been reiterating that interest rates should remain in a restrictive trajectory for some time until price stability is ensured. They warned that premature rate cuts could uplift overall demand, which could lead to a rebound in price pressures.
    • Market participants will focus on the interest rate outlook to be provided by Fed policymakers after the announcement of the monetary policy.
    • It will be interesting to watch whether the Fed refers to March or May monetary policy meetings for starting the rate-cut process.
    • The appeal for Gold would strengthen if the Fed turns dovish for the March policy meeting.
    • Apart from the Fed’s policy, US economic data such as ADP Employment Change, ISM Manufacturing PMI, and official employment data for January will be keenly watched.
    • But first of all, investors will react to the US JOLTS Job Openings data for December, which will be published at 15:00 GMT. According to the consensus, job openings are expected to come in at 8.75 million, slightly lower from the 8.79 million recorded for November.

    Technical Analysis: Gold price refreshes weekly high near $2,040

    Gold price rises to near $2,040, supported by geopolitical tensions. The precious metal has strengthened after delivering a breakout of the Symmetrical Triangle chart pattern formed on a daily time frame. A breakout of the aforementioned chart pattern indicates a volatility expansion, which results in wider ticks and heavy volume. The near-term appeal has turned bullish as price is sustaining strongly above the 20-day Exponential Moving Average (EMA). 

    However, the 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 area, which indicates that momentum is weak.

    Gold FAQs

    Why do people invest in Gold?

    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.

    Who buys the most Gold?

    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.

    How is Gold correlated with other assets?

    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.

    What does the price of Gold depend on?

    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.

    Disclaimer: For information purposes only. Past performance is not indicative of future results.
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