Gold (XAU/USD) is trading with a positive bias for the second straight day on Thursday, though it lacks bullish conviction and remains below the $4,000 psychological mark through the Asian session. Investors remain worried about the potential economic fallout from a prolonged US government shutdown. This, in turn, caps the recent US Dollar (USD) rally to its highest level since late May and turns out to be a key factor acting as a tailwind for the commodity. Apart from this, geopolitical uncertainties lend support to the safe-haven precious metal.
The XAU/USD bulls, however, seem reluctant to place aggressive bets on the back of the latest optimism over easing US-China trade tensions. Adding to this, the US Federal Reserve’s (Fed) hawkish tilt helps limit deeper USD losses and contributes to capping the non-yielding Gold. Hence, it will be prudent to wait for strong follow-through buying before confirming that the recent corrective decline from the record high touched in October has run its course and positioning for any meaningful appreciating move for the commodity.
Daily Digest Market Movers: Gold draws support from economic concerns and a softer USD
- The US government shutdown entered its sixth week on Wednesday, becoming the longest in history and surpassing the 35-day record set during President Donald Trump’s first term. Economists now seem worried that a prolonged government closure would affect the economic performance.
- The nonpartisan Congressional Budget Office estimated the government shutdown could slice between 1.0 and 2.0% off Gross Domestic Product in the fourth quarter. This caps the recent US Dollar rally to its highest level since late May and supports the safe-haven Gold for the second straight day.
- Russian President Vladimir Putin has ordered preparations for nuclear testing after Trump said last week that the US would be running tests. Moreover, Russia has intensified its offensive and launched coordinated artillery strikes across eastern Ukraine, further benefiting the bullion.
- Automatic Data Processing reported that private sector employment in the US rose by 42K in October, against 25K estimated and a 29K decrease recorded in the previous month. Separately, the Institute for Supply Management’s (ISM) Non-Manufacturing Purchasing Managers’ Index rose to an eight-month high.
- Traders scaled back their bets for another 25-basis-point rate cut in December following the US Federal Reserve’s hawkish tilt last week. This could limit any meaningful USD corrective decline and keep a lid on a further appreciation for the non-yielding yellow metal, warranting some caution for bulls.
- Traders look forward to speeches from influential FOMC members later during the North American session for cues about the future rate-cut path. This will play a key role in driving the USD demand, which, along with the broader risk sentiment, should provide some impetus to the XAU/USD pair.
Gold needs to surpass the $3,990-3,995 confluence hurdle to back the case for additional gains
The commodity is currently placed near the $3,990-3,995 confluence hurdle – comprising a short-term descending trend-line extending from last Friday and the 200-hour Simple Moving Average (SMA). A convincing breakout through the said barrier could trigger a short-covering move towards the $4,025-4,030 horizontal resistance. Some follow-through buying beyond the $4,040-4,045 region might shift the near-term bias back in favour of the XAU/USD bulls and pave the way for a move towards reclaiming the $4,100 mark with some intermediate hurdle near the $4,075 area.
On the flip side, weakness below the $3,972-3,970 immediate support might continue to attract some dip-buyers, which should help limit the downside for the Gold near the $3,940-3,935 region. The next relevant support is pegged near the $3,910-3,900 region and last week’s swing low, around the $3,886 zone. Failure to defend the said support levels would be seen as a fresh trigger for bearish traders and set the stage for the resumption of the recent corrective decline from the all-time peak.
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.