The price of gold (XAU/USD) fell 0.44% on Tuesday as the yellow metal failed to reach the $4,200 level amid rising US consumer inflation expectations and threats of renewed hostilities in the Middle East following reports of attacks in the Strait of Hormuz. The XAU/USD pair is trading at $4,146 after reaching a high of $4,180.
Bullion retreats as yields rise and Hormuz returns to risk
The yellow metal appears poised to consolidate after failing to break the descending resistance trendline near $4,200, which deepened XAU’s decline towards the $4,150 area. The latest data from the New York Fed showed inflation expectations rose to their highest level since September 2023.
The New York Fed’s Consumer Expectations Survey showed Americans growing concerned about the high cost of living, with annual inflation expectations rising from 3.5% in May to 3.7% in June. Further data showed that the balance of trade in goods and services deficit widened from -$54.6 billion in April to -$77.6 billion in May, below estimates of -$78 billion.
Unanchoring inflation expectations could be a reason for Fed officials to raise interest rates. Additionally, reports from the Middle East indicated that two ships were attacked by Iran’s Revolutionary Guard Corps (IRGC), Iran’s Fars news agency reported, fueling fears that energy prices could rise again before U.S.-Iran talks resume.
Oil prices immediately rose, which strengthened the dollar due to their positive correlation. At the time of writing, Western Texas Intermediate (WTI), the US crude oil benchmark, is up over 2.70% to $70.48 per barrel. At the same time, the US dollar index (DXY), which measures the performance of the dollar against a basket of six currencies, is 199.97, up 0.12%.
Another reason to consider is rising U.S. Treasury yields. The 10-year U.S. Treasury yield rose 5.5 basis points to 4.525%. Despite this, money markets are skeptical about an interest rate enhance at the meeting on July 29, but according to Prime Market Terminal, the chances of it happening in September are close to 60%.
The World Gold Council reported that the People’s Bank of China (PBoC) added further gold reserves for the 20th consecutive month, with gold stocks reaching 75.44 million troy ounces at the end of June, up from 74.96 million a month earlier.
Investors’ eyes turn to Wednesday’s release of the minutes from the latest FOMC meeting, followed by Thursday’s jobless claims data for the week ending July 4.
XAU/USD Technical Outlook: Gold Remains Bearish Below $4,200, Sellers Expect $4,000
Gold’s downtrend will deepen if XAU fails to break through the resistance line at around $4,200-$4,225. Moreover, the formation of a “death cross” on the daily chart means that sellers are gaining strength, which could lead to further declines.
The relative strength index (RSI) remains bearish despite approaching the neutral level of 50. It has signaled the potential for additional decline over the past two trading sessions.
The path of least resistance for Bullion is downward. The first support level is $4,150, followed by the psychological limit of $4,100. A breach of the latter will reveal a milestone of $4,050, which tops the $4,000 mark and a year-to-date low of $3,941.
For an upward turn to occur, gold must clearly break above the $4,250 mark and then move towards the $4,300 level. Resistance levels include the 50-day SMA at $4,391 and the 200-day SMA at $4,488, with $4,500 also in sight.
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 operate 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 unthreatening 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. Despite this, most of the movements depend on the behavior of the US dollar (USD) when the asset is priced in dollars (XAU/USD). A forceful dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
