Gold price drifts lower amid modest USD strength, downside potential seems limited
- Gold price attracts some sellers and snaps a two-day winning streak amid a bullish USD.
- Expectations for a less aggressive Fed easing underpin the US bond yields and the buck.
- Geopolitical risks and bets that the Fed will cut rates further limit losses for the XAU/USD.
Gold price (XAU/USD) rallied over 1% on Friday and settled near the weekly top following the release of the US Producer Price Index (PPI), which pointed to a favorable inflation outlook and suggested that the Federal Reserve (Fed) will cut interest rates further. Apart from this, safe-haven demand stemming from the geopolitical tensions in the Middle East further benefited the bullion and contributed to the move up.
That said, investors have now fully priced out the possibility of another oversized Fed rate cut in November. This keeps the US Treasury bond yields elevated and the US Dollar (USD) close to its highest level since mid-August touched last week. Adding to this, the optimism led by China's pledge to increase debt to revive its economy exerts some pressure on the Gold price during the Asian session on Monday.
Daily Digest Market Movers: Gold price is pressured by modest USD strength, downside potential seems limited
- The US Bureau of Labor Statistics reported that the headline Producer Price Index (PPI) for final demand rose 1.8% and the core gauge climbed 2.8% on a yearly basis in September.
- The readings were slightly higher than consensus estimates, though pointed to a deceleration in price rise, which should allow the Federal Reserve to continue cutting interest rates.
- According to the CME Group's FedWatch Tool, the markets are currently pricing in over a 90% chance that the Fed will lower borrowing costs by 25 basis points in November.
- The yield on the benchmark 10-year US Government bond, however, holds steady above the 4% threshold amid diminishing odds for a more aggressive policy easing by the Fed.
- This, in turn, assists the US Dollar to stand tall near a two-month peak and turns out to be a key factor that prompts fresh selling around the Gold price on the first day of a new week.
- Government data released over the weekend showed that China's headline Consumer Price Index was flat in September and the yearly rate stood at 0.4%, missing market expectations.
- This, along with the lack of numerical details for China's fiscal stimulus and escalating geopolitical tensions in the Middle East, should offer support to the safe-haven precious metal.
- The US market is closed on Monday for the Columbus Day holiday, leaving the XAU/USD at the mercy of the USD price dynamics and fresh geopolitical developments.
Technical Outlook: Gold price setup supports prospects for the emergence of dip-buying, $2,600 holds the key for bulls
Any subsequent slide is likely to find some support near the $2,632-2,630 region, below which the Gold price could accelerate the fall towards the $2,600 round-figure mark. A convincing break below the latter will be seen as a fresh trigger for bearish traders and pace the way for some meaningful downfall. The XAU/USD might then drop to the next relevant support near the $2,560 zone and extend the decline towards the $2,535-2,530 region en route to the $2,500 psychological mark.
Meanwhile, positive oscillators on the daily chart favor bullish traders. That said, it will still be prudent to wait for some follow-through buying beyond the $2,660-2,662 horizontal resistance before positioning a further near-term appreciating move. The subsequent move up has the potential to lift the Gold price to an all-time high, around the $2,685-2,686 region touched in September. This is closely followed by the $2,700 round-figure mark, which if cleared decisively will set the stage for an extension of a well-established multi-month-old uptrend.
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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