Gold retreats as US Dollar rebounds, outlook remains firm on US debt concerns
- Gold price surrenders intraday gains and falls to around $3,300 as the US Dollar finds temporary support.
- Mounting US fiscal deficit concerns keep the outlook for the Gold price upbeat.
- US President Trump stated that Russia is unlikely to end the war in Ukraine.
Gold price (XAU/USD) gives up its intraday gains and falls back to near $3,300 during European trading hours on Thursday after revisiting the two-week high around $3,345 earlier in the day. The precious metal retreats as the US Dollar (USD) gains ground after posting a fresh two-week low on Wednesday.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.15% higher at nearly 99.85 after recovering from its recent low of 99.35.
Technically, a higher US Dollar makes the Gold price an expensive bet for investors.
However, the outlook of the precious metal remains firm as escalating concerns over already-stretched United States (US) debt have strengthened the demand for safe-haven assets, keeping the US Dollar (USD) and demand for Treasury bonds on the back foot.
Additionally, fading hopes of a positive outcome from truce talks between Russia and Ukraine also support the Gold price. Geopolitical tensions increase the demand for safe-haven assets, such as Gold.
Daily digest market movers: Gold price remains largely firm on US fiscal crisis, Russia-Ukraine tensions
- The strong performance by the Gold price in the past few trading days was driven by increasing concerns over the US debt. On Wednesday, US Republicans controlled House Rules Committee approved President Donald Trump’s tax-cut bill and advanced it for a full House vote to be held on Thursday. The legislation is expected to increase the national debt by $3.8 trillion over a decade, according to the nonpartisan Congressional Budget Office.
- Market experts have warned that the clearance of Trump’s new bill will widen the US fiscal deficit crisis and increase interest obligations for the administration at a time when the nation is battling potential economic risks prompted by Trump’s tariff policy.
- US debt concerns increased after Moody’s downgraded the US sovereign credit rating by one notch to Aa1 from Aaa on Friday. The firm stripped off the US top credit rating for successive administrations and Congress failing to agree on measures to “reverse the trend of large annual fiscal deficits and growing interest costs”.
- Domestically, growing fears of stagflation are also expected to keep the Gold demand intact. On Wednesday, JPMorgan Chase & Co CEO Jamie Dimon argued in favor of the Federal Reserve’s (Fed) stance to maintain interest rates at their current levels due to potential stagflation risks from geopolitics, deficits, and price pressures, Bloomberg reported. “The Fed is doing the right thing to wait and see before it decides on monetary policy,” Dimon said. "I don’t agree that we’re in a sweet spot," he added.
- Theoretically, the demand for precious metals increases in a high-inflation environment, but the Fed’s stance to keep borrowing rates at their current levels for longer bodes poorly for non-yielding assets such as Gold.
- Meanwhile, investors await the preliminary US S&P Global Purchasing Managers’ Index (PMI) data for May, which will be published at 13:45 GMT.
- On the geopolitical front, hopes of a ceasefire between Russia and Ukraine have diminished as US President Trump stated in a private conference call with European leaders that Russian leader Vladimir Putin would not agree to a truce because he thinks he is winning the war, the Wall Street Journal (WSJ) reported.
- There is a notable shift in US President Trump’s stance on war in Ukraine as earlier this week he stated in a post on Truth.Social that both nations have agreed to immediate truce talks in the Vatican City. However, Trump didn’t provide any time frame for such negotiations. Trump also expressed confidence that both countries will focus on ending the war.
Technical Analysis: Gold price holds above key 20-day EMA
Gold price struggles to break above the upward-sloping trendline on a daily time frame around $3,335, which is plotted from the December 12 high of $2,726. However, the near-term trend of the precious metal is bullish as its price holds above the 20-day Exponential Moving Average (EMA), which trades around $3,268.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting indecisiveness among market participants.
Looking up, the May 7 high at around $3,440 will act as key resistance for the metal. On the downside, the May 15 low at $3,120 is a key support zone.
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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