The gold price (XAU/USD) extends its losses on Friday, falling almost 10%, falling below $4,900 after US President Donald Trump revealed his choice for Fed chairman, while a scorching US inflation reading justified Wednesday’s decision by the Federal Reserve (Fed) to keep interest rates steady. The XAU/USD rate fluctuates around the upper/lower limits of $5,000.
Bullion fell more than 7% after a hawkish Fed chairman nomination and stubborn inflation dashed hopes for easing
On Friday morning, Trump revealed that he had chosen Kevin Warsh as the recent president of the US central bank. Warsh was known as a hawk during his previous term as Fed governor.
Since the announcement, gold prices have accelerated losses again, while the dollar has pared losses even though it was expected to suffer losses of more than 1.42% in January, according to the US dollar index (DXY).
DXY, which measures the US currency’s performance against six other currencies, rose 0.74% to 96.87, weighing on bullion prices.
Long-term U.S. Treasury yields are rising, which means speculators see it less likely that Warsh will be able to cut interest rates “on a massive scale” to please the White House. The US 10-year Treasury yield increased by one and a half basis points and stands at 4.247% at press time.
Meanwhile, Fed speakers are speaking, led by Atlanta’s Raphael Bostic, Fed chairs Christopher Waller and Stephen Miran.
On the data side, prices paid by U.S. producers missed slowdown estimates and remained consistently above the Fed’s 2% target. This confirms the Fed’s decision on Wednesday to keep interest rates on hold amid growing concerns that inflation could accelerate again.
Next week’s U.S. economic report will include a tranche of U.S. employment data, speeches by Fed officials, and ISM manufacturing and services PMIs for January.
Daily market movements: Gold falls sharply as the US dollar rebounds
- Fed Governor Stephen Miran described Warsh as an excellent choice for the Fed, noting that the main factors driving the recent PPI augment are home prices and portfolio management fees.
- Gov. Christopher Waller noted that the labor market remains frail despite steady economic growth and noted that inflation would be close to 2% if it weren’t for tariffs that keep it near the 3% level. Waller also stated that the policy should be closer to neutral, around 3%.
- Atlanta Fed President Raphael Bostic stressed the need for patience in monetary policy, suggesting it should be somewhat restrictive, and noted that the full impact of tariffs on prices is not yet evident. He expects inflation to remain stable.
- The US Bureau of Labor Statistics (BLS) released the producer price index (PPI) for December, which increased by 3% y/y, remaining unchanged from November and falling compact of expectations of a 2.7% decline. Core PPI, excluding food and energy components, increased by 3.3% y/y, compared to a 3% augment in the previous month and, contrary to the consensus forecast, a decline to 2.9%.
- The Fed left interest rates unchanged last Wednesday, taking a cautious approach and revealing that policy decisions would be made at each meeting.
- At the time of writing, money markets were pricing in 51 basis points of year-end Fed easing, data from Main Square Terminal.
Technical Outlook: Gold falls below $5,000 as bear prices fall
On Friday, gold fell sharply, breaking key support levels such as $5,000, extending its losses to $4,850. The bullish momentum appears to be fading, as reflected by the Relative Strength Index (RSI) reaching its neutral level.
However, the uptrend will remain intact unless XAU/USD breaks below the December 26 high of $4,549, which could sharpen a test of the 50-day SMA at $4,474.
If XAU/USD regains $5,000, the first resistance will be the January 27 high at $5,182, ahead of $5,200. Next up will be $5,300.
Gold FAQs
Gold has played a key role in human history as it has been widely used as a store of value and a medium of exchange. Nowadays, beyond its luster and utilize in jewelry, the precious metal is widely viewed as a safe-haven asset, meaning it is considered a good investment in turbulent times. Gold is also widely seen as a hedge against inflation and currency depreciation because it is not tied to any particular issuer or government.
Central banks are the largest holders of gold. To support their currencies in turbulent times, central banks typically diversify their reserves and purchase gold to improve the perceived strength of the economy and currency. High gold reserves may provide a source of confidence in the country’s solvency. According to data from the World Gold Council, central banks added 1,136 tons of gold to their reserves in 2022, worth about $70 billion. This is the highest annual purchase since registration began. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the US dollar and US treasury bonds, which are both major reserve assets and safe and sound haven assets. When the dollar depreciates, gold tends to rise, allowing investors and central banks to diversify their holdings in turbulent times. Gold is also inversely correlated with risky assets. A rally in the stock market tends to weaken the price of gold, while sell-offs in riskier markets support the precious metal.
The price may change due to many factors. Geopolitical instability or fear of a deep recession can quickly cause gold prices to rise due to its safe-haven status. Gold, as a non-yielding asset, tends to rise at lower interest rates, while the higher cost of money tends to weigh on the yellow metal. Still, most of the movements depend on the behavior of the US dollar (USD) when the asset is priced in dollars (XAU/USD). A robust dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
