Gold sinks as geopolitics, trade war optimism hurt safe-haven demand
- Gold price falls for a second straight day and is 10% down from its all-time high..
- The US administration is softening its tone on several fronts, reducing safe-haven flows towards the precious metal.
- Bullion traders could expect Gold to retest the $3,000 level.
Gold (XAU/USD) slides towards $3,146 at the time of writing on Thursday after another slew of headlines from United States (US) President Donald Trump that led traders to flee from safe-haven assets. In his latest comments on Thursday during a visit to the Middle East, Trump said talks with Iran on a nuclear deal are possible, CNN reports. Trump added that both Syria and Yemen deserve a chance, which is seen as a huge step in defusing tensions in the Middle East.
These headlines led traders to sell Gold as they signal that global geopolitical tensions are easing. Meanwhile, progress in trade talks also added to bearish headwinds for the precious metal, with China suspending a ban on exports of items with both military and civil applications to 28 US companies. The détente between the two largest economies has reduced the bid for Gold already earlier this week, Bloomberg reports.
The attention for Gold traders also shifts to Turkey, where top US and European diplomats meet to discuss any possible breakthrough in the Russia-Ukraine war. Still, the chances of a major advance in the negotiations look unlikely as Russian President Vladimir Putin won’t attend the meetings.
Daily digest market movers: Even US yields are a headwind for Gold
- US yields are not helping in the case for some upside reprieve in Gold prices. The US 10-year benchmark rate keeps climbing higher towards 4.54% in early Thursday trading, way above the 4.11% seen at the start of May.
- On Wednesday, Vice Chair Philip Jefferson said that the Federal Reserve's (Fed) policy is well positioned to respond in a timely way on a surprise drop or surge in inflation. Jefferson added that there is a high uncertainty that inflationary pressures would be temporary. Prospects of high interest rates for longer weigh on non-interest-bearing assets such as Gold.
- Hedge funds are rebalancing their holdings on Gold. First Eagle Investments’ $59 billion global fund, for example, maneuvered through April’s plunging markets by selling Gold and using the proceeds to buy freshly discounted stocks. The rebalancing trade helped the portfolio ride the rebound in equities and boosted its returns to almost 10% this year. Matthew McLennan of the First Eagle Global Fund is still bullish on Gold, but trimmed the position to prevent the fund from becoming overly concentrated, Bloomberg reports.
Gold Price Technical Analysis: Watch out for the return below $3,000
Gold is now quickly racking up losses and looks set to be facing some more downturn. Easing geopolitical tensions, trade war fears, and the Fed likely to keep its monetary policy unchanged for longer, all bearish elements for the Gold price, are eating away at its momentum. Once the 55-day Simple Moving Average (SMA) at $3,130 snaps and faces a daily close below, there is not much is in the way to avoid the Gold price from dropping towards $3,000 and lower.
On the upside, the pivotal technical level at $3,167 (April 3 high)is now overturned into a resistance and could be difficult to reclaim. Once through there, the daily Pivot Point comes in line with the big $3,200 figure. In case that level can be recovered, the R1 resistance at $3,233 and the R2 resistance at $3,289 are the following levels to watch, though a major catalyst would be needed to get it there.
On the other side, as already mentioned above, one level to watch is the 55-day SMA at $3,130. Once that gives way, the technical level at $3,004 (March 14 high), which roughly coincides with the $3,000 big marker, could be quickly tested. Further down, the 100-day SMA at $2,971 is the bottom level foreseen for now.
XAU/USD: Daily Chart
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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