Gold should be the asset you crave when the world looks dicey, which makes this week’s price action quite extraordinary. Bullion finished the week down nearly 1.5%, its sixth straight week of declines or lasting closures, even though the Middle East war was now in its fourth month and an unsigned ceasefire kept geopolitical risks on the table. The metal, which is expected to thrive against this backdrop, is instead heading towards the $4,000 level, well off February’s high of $5,600. The explanation has almost nothing to do with fear and almost everything to do with the Federal Reserve (Fed).
The only chart that matters is the Fed
From all the geopolitical headlines, gold has been trading solely as the inverse of US real yields for the past six weeks. The Federal Open Market Committee (FOMC) kept the interest rate at 3.75% in June but raised its scatter plot, with the median projection now pointing to a hike and markets leaning toward increases in 2026 rather than the cuts they predicted last year. Higher interest rates and more stalwart real rates of return raise the opportunity cost of holding assets that produce nothing; The US dollar index, at a 13-month high, does the rest. In this view, each bullish geopolitical impulse was defeated by a single bear market.
Hot inflation, cool metal
The cruel twist for gold bulls is that inflation does exactly what it should facilitate them and instead hurts them. The main consumer price index (CPI) rose above 4% y/y in May; the energy shock increased inflation expectations across the board. This is usually a buy signal to hedge against inflation. The problem is that the market trusts the Fed to quell balmy inflation with higher rates, which makes the same data become both an inflation signal and a signal of monetary tightening. The exacerbation signal wins; Gold pays the bill.
In a week, the data will speak for itself
Like any dollar-sensitive asset, gold now awaits next Thursday’s data. At 12:30 GMT, the United States releases its third estimate of Gross Domestic Product (GDP) for the first quarter along with the May Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred measure of inflation. In the case of gold, the logic is brutally straightforward: we can already see that the underlying PCE is accelerating to 0.3% m/m from 0.2%; any print at par or above that reinforces the price escalate, increases real profitability and pushes the metal towards $4,000 and potentially even beyond that amount.
The downside surprise is the bulls’ clearest escape route, offering room for a relief bounce. The only hurdle is positioning, as the hourly Relative Stochastic Strength Index (Stoch RSI) has returned to overbought after rebounding this week, meaning the immediate declines could stall before another decline.
Resistance: The first ceiling is the $4,200 area; above the 200-day exponential moving average (EMA) near $4,365 and the 50-day EMA up near $4,500 mark the levels that would be necessary to achieve true economic recovery.
Support: This week’s low near $4,120 is an immediate low. Below is the $4,000 handle, a true line in the sand; a decisive break opens the way towards high USD 3,000.
Deviation: Bearish as price remains below daily moving averages and Fed maintains price increases. The path of least resistance points to $4,000; next week’s balmy PCE is the catalyst that will most likely carry gold through. The only short-term argument for a rebound is a cushioned inflation print. even then, the downward trend remains intact.
XAU/USD Hourly Chart
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 employ 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 sheltered 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 vary 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 in 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 powerful dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
