Gold pares gains, remaining close to recent highs, as Treasury buybacks weigh on US Dollar
- Gold takes a breather after climbing more than 4% on the previous day to a two-and-a-half-month high.
- Treasury buybacks weaken the US Dollar and pull long-term borrowing costs away from multi-year highs.
- XAU/USD holds a bullish bias while fluctuating near the 200-day Simple Moving Average.
Gold (XAU/USD) bulls take a breather on Thursday following the sharp rally on the previous day, triggered by a steep pullback in long-term US Treasury yields. At the time of writing, XAU/USD trades around $4,488, easing from an intraday high of $4,527, its highest level since June 2.
The precious metal climbed over 4% on Wednesday after the US Treasury Department announced that it would increase its liquidity-support buybacks for longer-dated government securities. In reaction, the 30-year Treasury yield fell around 9 basis points (bps) to 5.18%, while the benchmark 10-year yield dropped about 5 bps to 4.63%.
The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, fell below 99.00 on Wednesday, touching a three-month low and continues to lose ground on Thursday. The combination of a weaker US Dollar and falling yields increased the appeal of non-yielding Gold, lifting the metal to its highest level in more than two months.
The Treasury’s move provided some relief to the bond market after the 30-year yield climbed above 5.30% earlier this week, its highest level since 2007. However, both the 10-year and 30-year yields are up around 3 basis points on Thursday. The buybacks may ease pressure in the short term, but they do not address large fiscal deficits, heavy debt issuance or persistent inflation risks, analysts warn.
Higher energy prices add to inflation risks as the standoff between the US and Iran keeps shipping through the Strait of Hormuz heavily restricted. West Texas Intermediate (WTI) Oil trades around $86.25 per barrel, up roughly 6% so far this week.
US President Donald Trump announced tougher economic action against Iran on Wednesday, warning of “economic conflict and isolation on an unprecedented scale.”
Persistent inflation was also a key concern in the minutes of the Federal Reserve’s (Fed) July meeting, which were released on Wednesday. Many policymakers judged that higher interest rates would likely be needed if inflation failed to decline, while some questioned whether financial conditions were restrictive enough to bring inflation back to the Fed’s 2% target.
Technical Analysis: XAU/USD battles the 200-day SMA
On the daily chart, XAU/USD retains a bullish near-term bias as prices hold above the 50-day and 100-day Simple Moving Averages (SMAs) at $4,164 and $4,380, respectively. The metal is now fluctuating near the 200-day SMA at $4,512 after briefly climbing above it.
The Relative Strength Index (RSI) stands near 65, while the Moving Average Convergence Divergence (MACD) histogram remains positive, pointing to firm upside momentum.
A daily close above the 200-day SMA could open the door toward the horizontal resistance at $4,650. On the downside, the 100-day SMA at $4,380 offers initial support, followed by the 50-day SMA at $4,164 and the $4,000 psychological mark.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.