Gold price (XAU/USD) extends its rally to near $4,050.00 during the European trading session on Wednesday. The precious metal continues to move higher as deepening political crisis in France and the United States (US) government shutdown have increased the demand of safe-haven assets, such as Gold.
French political crisis prompted after Prime Minister Sebastien Lecornu announced a sudden resignation after appointing new cabinet.
Meanwhile, US President Donald Trump threatened on Tuesday that the White House would cut spending programs as the government enters its second week of shutdown. Trump also stated that he will provide details about lay-offs in federal agencies in next four or five days.
Weakness in the Euro (EUR) due to French political crisis has increased the safe-haven demand of the US Dollar (USD) too. During the European session, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps to near 99.00, the highest level seen in two months.
Technically, higher US Dollar makes the Gold price an expensive bet for investors.
Another reason behind strength in the Gold price is firm expectations that the Federal Reserve (Fed) will cut interest rates two times more this year. According to the CME FedWatch tool, traders see an 82% chance that the Fed will cut interest rates by 25 basis points (bps) in each of its two policy meetings remaining this year.
For more cues on the monetary policy outlook, investors await Federal Open Market Committee (FOMC) minutes of the September policy meeting, which will be published at 18:00 GMT.
Gold technical analysis
Gold price remains in uncharted territory from over a month. The near-term trend of the Gold price remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around $3,800. Upward-sloping trendline from the August 22 low around $3,321.50 will act as key support for the Gold price.
The 14-day Relative Strength Index (RSI) stays above 60.00 from a long period, suggesting a strong bullish momentum.
On the upside, the Gold price could extend its upside towards $4,100. Looking down, the October 2 high around $3,900 would act as key support.
Gold daily chart
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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.