Gold moderates lower as stronger US Dollar weighs
- Gold pulls back on Wednesday as a result of a stronger US Dollar.
- The Greenback is rising due to less dovish interest rate expectations in the US.
- XAU/USD starts a new short-term uptrend on the 4-hour chart.
Gold (XAU/USD) pauses its recovery and pulls back into the $2,620s on Wednesday due mostly to the effect of a stronger US Dollar (USD). Since Gold is mainly priced and traded in USD, this automatically has the effect of lowering its price even though all other things being equal.
Gold stalls in the middle of recovery
Gold recovered from eight-week lows in the $2,530s at the beginning of the week as a result of increased safe-haven flows. This came on the back of a ratcheting up of geopolitical tensions after Russia amended its conditions for using its nuclear armaments. The move was interpreted as a warning to Ukraine and its allies following the decision of US President Joe Biden to allow Ukraine to use US-made long-range ATACMS (Army Tactical Missile System) missiles to strike targets in Russia.
US Dollar on the rise
Gold is in retreat on Wednesday from a strengthening US Dollar, which is seeing gains as markets price in a lower probability – of now around 60% – of the Federal Reserve (Fed) cutting interest rates in December. Previously, markets had been 100% sure the Fed would go ahead with at least a 25 basis point (bps) (0.25%) rate cut. However, since President-elect Donald Trump won the US presidential election – and due to recently robust US macroeconomic data – the probabilities have steadily fallen. The Fed keeping interest rates elevated is positive for the US Dollar since it increases foreign capital inflows.
The main cause of the strengthening Dollar is Trump’s proposed economic and trade policies. These include increasing or placing tariffs on imports, which will effectively push up their prices, causing inflation and keeping interest rates high; lower taxes, which will increase spending power, thereby also pushing up inflation; and a more relaxed regulatory environment.
Technical Analysis: XAU/USD extends short-term uptrend
Gold recovers above a major trendline on Wednesday as it extends its short-term trend higher. Given the principle of technical analysis that “the trend is your friend,” the odds favor more upside to come.
XAU/USD 4-hour Chart
A break above the daily high at $2,642 will probably indicate an extension of the trend higher. The next target to the upside lies at $2,686, the September 26 high.
The precious metal is in a downtrend on a medium-term but an uptrend on a long-term basis, raising risks of moves both higher or lower in line with these broader cycles.
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.