Gold (XAU/USD) consolidates losses on Monday after coming under bulky selling pressure earlier in the week as markets digest changing macro and geopolitical factors. At the time of writing, XAU/USD is trading around $5,109 after hitting an intraday low near $5,014 during the Asian trading session.
The metal is missing further selling as US dollar (USD) and Treasury yields have eased slightly from recent highs, with prices still down about 0.95% on the day.
Rising oil prices deepen concerns about inflation in the face of the US-Iran conflict
Since the beginning of the US-Iran conflict, the price of the precious metal has been highly volatile. Rising geopolitical tensions continue to underpin safe-haven demand, helping to limit deeper losses. But at the same time, the war is disrupting the flow of oil through the Strait of Hormuz, causing oil prices to soar and fueling fears of global inflation.
West Texas Intermediate (WTI) crude rose to around $113, its highest level since June 2022, before paring gains on reports that G7 countries were discussing a coordinated release of oil reserves through the International Energy Agency (IEA) to ease supply concerns. As of this writing, WTI is trading near $91.40 per barrel, up almost 3% on the day.
While gold is often seen as a hedge against inflation, an oil-induced inflation shock tends to push up Treasury yields and support the U.S. dollar, while lowering expectations for short-term interest rate cuts from major central banks. These factors have a negative effect on the unstable metal and continue to deter growth attempts.
Markets quickly reacted to rising energy prices, limiting expectations for interest rate cuts by the Federal Reserve (Fed). According to the CME FedWatch Tool, the probability of a 25 basis point (bps) rate cut in June has fallen to about 30%, down from about 50% a month ago. Meanwhile, the chances of a July cut are close to 40%.
Soft NFP raises fears of stagflation ahead of US inflation data
Last week’s surprise decline in the U.S. nonfarm payroll (NFP) rate complicates the outlook, highlighting the growing risk of stagflation and leaving the Fed with a policy dilemma as it tries to offset persistent inflation with deteriorating labor market conditions.
The American economy laid off 92,000 jobs in February. jobs, not expecting an enhance of 59 thousand, after adding 126 thousand. jobs in January. The unemployment rate rose to 4.4% from 4.3% the previous month.
Looking ahead, US inflation data released this week could impact interest rate expectations. Economists expect the consumer price index (CPI) to remain at 2.4% y/y in February, unchanged from January. Meanwhile, the Price Index for Basic Consumer Expenditures (PCE) (January data) is expected to remain at 3.0% y/y.
Technical Analysis: XAU/USD is struggling for direction in the $5,000-5,200 range
From a technical perspective, the short-term bias remains cautiously neutral, with prices ranging from $5,000 to $5,200.
XAU/USD is trading slightly below the 100-period plain moving average (SMA) near $5,118, while the 50-period SMA near $5,189 continues to limit upside attempts, indicating waning bullish momentum and a lack of sturdy directional confidence.
On the other hand, a decisive break below the 100-period SMA could open the door to a renewed psychological test of the $5,000 level. A sustained move below this support could expose deeper downside targets near $4,850, around the February 18 low, and then $4,650 near the February 6 low.
On the other hand, a break above the $5,200 resistance zone could revive the bullish momentum and pave the way towards the $5,400-5,500 region.
Dynamics indicators strengthen the prospects for consolidation. The relative strength index (RSI) is hovering around 43, remaining below the neutral level of 50 and suggesting moderate bear pressure without entering oversold territory.
Meanwhile, the moving average convergence divergence (MACD) remains slightly below the zero line with a flattened profile, signaling confined directional conviction in the miniature term.
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 protected 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 sturdy dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
