Gold prices (XAU/USD) fell slightly on Wednesday due to a forceful strengthening of the US dollar (USD) after the release of US inflation data, which maintained the status quo. Hostilities between the U.S., Israel and Iran continue for a twelfth straight day, heightening speculation about higher oil prices and raising concerns about inflation. At the time of writing, the XAU/USD rate was trading at $5,170, down 0.37%.
XAU/USD under pressure amid geopolitical tensions and higher energy prices
The main factor influencing oil prices, which have skyrocketed, is geopolitics. For the foreseeable future, the US dollar will remain tied to oil prices as countries try to buy the US dollar to pay for high gasoline prices. As of this writing, WTI is up 4.76% to $87.36.
The US Dollar Index (DXY), which measures the dollar’s performance against a basket of six currencies, rose 0.32% to 99.22, weighing on gold prices.
Gold, which typically appreciates in the face of geopolitical uncertainty and inflation, is under pressure from high U.S. Treasury yields. The release of the latest U.S. inflation report was bland, but the war in the Middle East and rising gasoline prices forced traders to balk at the prospect of Federal Reserve cuts in interest rates.
According to Prime Market Terminal data, money markets were pricing in 30 basis points of monetary easing at the end of the year.
Previously, U.S. consumer inflation remained broadly unchanged. The Consumer Price Index (CPI) was in line with estimates, with the January print coming in at 2.4% YoY in February. As expected, core data for the same period increased by 2.5%.
U.S. Treasury yields are rising as investors appear concerned about high gasoline prices. The US 10-year Treasury yield rose more than 6 basis points to 4.218%.
To ease high oil prices, the International Energy Agency (IEA) agreed to release more than 400 million barrels to ease price pressures caused by the closure of the Strait of Hormuz.
Nevertheless, Iran said the world should be ready for oil prices to hit $200 a barrel as it continues to attack ships passing through the Strait of Hormuz.
XAU/USD Technical Outlook: Gold will remain in an uptrend
Gold prices continued to consolidate, trending steadily higher, but failed to break the recent cycle high of $5,419 on March 2. Nevertheless, the momentum is bullish, as indicated by the Relative Strength Index (RSI), which remains above its 50-neutral level while consolidating near it.
However, to return to growth, Bullion should break the March 10 high of $5,238. Once crossed, it opens the door to testing $5,300, then $5,350 and the March 2 high. If these levels are broken, the next resistance will be at $5,419.
Conversely, a decline in the gold price below $5,100 paves the way for a challenge to key demand levels, including the March 9 intraday low of $5,014 followed by a 50-day elementary moving average (SMA) of $4,896.
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 secure 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 forceful dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
