Gold rebounds from over one-month low; upside potential seems limited
- Gold gains some positive traction, though the fundamental backdrop warrants caution for bulls.
- Inflation fears continue to fuel bets for more hawkish central banks and undermine the bullion.
- US-Iran tensions benefit the USD’s reserve currency status and further weigh on the commodity.
Gold (XAU/USD) attracts some buyers during the Asian session on Tuesday and reverses a part of the previous day's downfall to the $4,500 mark, or over a one-month low. The uptick lacks any obvious fundamental catalyst and runs the risk of fizzling out quickly, warranting caution before positioning for any meaningful upside. Heightened US-Iran tensions continue to fuel inflation concerns and keep expectations of higher interest rates alive. This, along with a firmer US Dollar (USD), should contribute to capping the non-yielding bullion.
The fragile ceasefire between the US and Iran is on the brink of collapse after a severe flare-up of violence in the Persian Gulf on Monday. The United Arab Emirates (UAE) and South Korea reported strikes on ships in the vital channel. The UAE also said a fire broke out at the oil port of Fujairah following Iranian missile and drone attacks. US President Donald Trump warned that Iran would be blown off the face of the earth if it attacks American vessels escorting ships through the strategic waterway under a new initiative called "Project Freedom".
The latest developments raise the risk of a further escalation of tensions in the Middle East and have triggered a fresh leg up in Crude Oil prices on Monday. This reaffirms market expectations that the war-driven surge in energy prices will revive inflationary pressure and prompt major central banks, including the US Federal Reserve (Fed), to adopt a more hawkish stance. According to the CME Group's FedWatch Tool, the probability of a Fed rate hike by the end of this year currently stands at roughly around 35% compared to less than 10% last Friday.
The outlook, in turn, remains supportive of elevated US Treasury bond yields and acts as a tailwind for the USD. Furthermore, the US-Iran standoff over the Strait of Hormuz turns out to be another factor that benefits the Greenback's reserve currency status and validates the near-term negative outlook for the commodity, suggesting that any subsequent move up is more likely to get sold into. Hence, it will be prudent to wait for strong follow-through buying before confirming that the Gold has bottomed out and positioning for further gains.
XAU/USD 4-hour chart
Gold might struggle to capitalize on the intraday move up amid a bearish technical setup
From a technical perspective, the XAU/USD pair retains a bearish near-term bias as it holds beneath the 200-period Simple Moving Average (SMA) at $4,655.02. The precious metal is also capped by the 38.2% Fibonacci retracement of the March-April upswing, leaving price confined under a dense resistance band despite a modest bounce from the $4,500 mark, or the 50% retracement level.
Meanwhile, momentum indicators remain soft, with the Relative Strength Index (RSI) hovering below the 50 line at 39.84 and the Moving Average Convergence Divergence (MACD) indicator in negative territory. This, in turn, hints that the attempted recovery could continue to fade under overhead supply at the 38.2% Fibo. at $4,595.23. A subsequent move up might confront hurdles near the 200-period SMA at $4,655.02 and then the 23.6% retracement at $4,711.12.
On the downside, initial support emerges at the 50% level near $4,501.57, ahead of the 61.8% retracement at $4,407.90, with deeper cushions at $4,274.55 and $4,104.68 if bearish pressure accelerates.
(The technical analysis of this story was written with the help of an AI tool.)
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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