Gold slides below $4,100 as FOMC Minutes signal further Fed hikes
- Gold falls 1.16% but recovers after briefly breaking $4,100.
- Fed Minutes show officials expect another rate hike this year.
- China extends Gold buying streak to 23 consecutive months.
Gold (XAU/USD) price pressures on the downside on Wednesday, yet it has reclaimed the $4,100 mark as US Treasury yields erased some of its earlier gains and turned negative. Meanwhile, the minutes of the latest meeting of the Federal Open Market Committee (FOMC) showed that all members supported September’s rate hike. At the time of writing, XAU/USD trades at $4,115, down 1.16%, after hitting a two-month low of $4,066 earlier in the day.
XAU/USD steadies as traders weigh further Fed tightening against softer Oil prices
The FOMC’s Minutes revealed that officials are divided on whether to raise rates as a precautionary move, while others see the move as the beginning of a tightening cycle aimed at curbing investment and spending to push prices lower.
The minutes revealed that “many participants” see the move as a means of “providing insurance against inflation remaining persistently above target.” Other members saw the decision as a measure to prevent inflation from broadening to other prices, while “a couple” said that the rate increase was intended to match a higher-than-expected neutral interest rate. Worth noting that Fed members expect another rate hike as "appropriate by year's end,” the minutes showed.
So far, money markets have priced out a potential rate hike at this month's meeting, with odds at 19%, while the chances of a hold are 80%, according to Prime Terminal.
After the release of the minutes, the yellow metal barely flicked. However, the US 10-year Treasury note yield is down one basis point to 5.27%, after hitting a 24-year high of 5.365%. At the time of writing, the US Dollar Index (DXY), which measures the performance of the Greenback against its peers, is up 0.40% at 102.24.
On Tuesday, two Fed officials crossed the wires. Kansas City Fed Jeffrey Schmid said that additional rate increases would be needed to curb high inflation, while San Francisco Fed Mary Dalysaid further adjustments to interest rates would be data-dependent and subject to external shocks, easing.
Despite this, Gold could recover in the near term as China’s central bank continued its purchases of the yellow metal for the 23rd straight month.
The drop in Oil prices, with West Texas Intermediate (WTI) aiming down 1.66% at $88.45, capped Bullion’s fall below $4,100, opening the door for a recovery.
Ahead, the US economic docket will feature the release of Initial Jobless Claims on Thursday, followed on Friday by the University of Michigan's Consumer Confidence report.
XAU/USD technical analysis: Gold remains bearish, but supported near $4,100
Gold’s downtrend faced key support at $4,100, and so far, sellers have been unable to decisively push prices lower, towards the $4,000 mark. Despite this, the overall trend suggests further XAU/USD weakness in the near term, with price action respecting the structure of lower highs and lower lows, while momentum remains negative, as indicated by the Relative Strength Index (RSI).
For a recovery, Gold must clear the $4,200 mark, ahead of a challenge to key ceiling levels at the 100- and 50-day Simple Moving Averages (SMAs), each at $4,267 and $4,331, respectively.
Conversely, the path of least resistance is for Bullion to fall below $4,100, test the July 29 swing low of $3,996, and then challenge the year-to-date (YTD) low of $3,941.
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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