Gold (XAU/USD) bounced higher on Thursday, fuelled by risk aversion following Wall Street’s reversal amid fresh concerns about valuations in the AI sector. The precious metal, however, remains unable to extend gains past the top of the weekly range at $4,030 as higher US Treasury yields and a firm US Dollar are acting as headwinds.
US yields and the US Dollar bounced strongly on Wednesday after the Federal Reserve Chairman, Jerome Powell, confirmed a widely expected rate cut but played down hopes of further easing this year. Bets of a December rate cut have declined to 64% from 91% ahead of the meeting, according to data from the CME FedWatch tool, while the yield on the benchmark US 10-year bond has risen beyond 30 basis points since last Wednesday, returning to levels beyond 4.10%.
Technical Analysis: Support at $3,900 area remains at short distance
Gold is showing a mild recovery attempt from Thursday’s lows at the $3,920 area. Yet, it is unable to find any significant acceptance above the top of the weekly range in the $4,030-$4,040 area (October 29 and 30 highs). This leaves the support area at around $3,900 (October 28 and 30 lows) exposed.
Technical indicators are mixed. The 4-hour Relative Strength Index (RSI) is wavering around the 50 level, showing a lack of clear bias, while the Moving Average Convergence Divergence (MACD) shows a frail upside momentum.
A successful break above the $4,040 level would ease bearish pressure and shift the focus towards $4,150 (October 23 highs), ahead of a previous support area near $4,220 (October 20 lows). On the downside, further depreciation below the October 28 low, near $3,890, would bring the October 2 low near $3,820 into focus. The measured target of an ABCD retracement from all-time highs near $4,380 would be at $3,795.
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.