The gold price (XAU/USD) continued its losses for an eighth straight day on Friday and could end the week down more than 8.50% as oil prices continued to rise, increasing the dollar’s appeal as a haven. A jump in U.S. Treasury yields and market participants pricing in no interest rate cuts by the Federal Reserve (Fed) are keeping downward pressure on the yellow metal.
Gold Poised for 8% Weekly Loss as Fed’s Rate Cut Bets Fail and Middle East Conflict Escalates
At the time of writing, the XAU/USD rate was trading at $4,560, down almost 2% on the day. The US dollar index (DXY), which measures the dollar’s performance against a basket of six currencies, rose 0.43% to 99.58.
The escalation of the conflict in the Middle East affects the precious metals segment. The Wall Street Journal’s headline was “Pentagon Sends More Troops to Middle East,” sending oil prices rising amid growing speculation about Iran’s foothold.
As a result, U.S. Treasury yields have risen, weighing on the yellow metal as 10-year Treasuries surged nearly 14 basis points to 4.384%, signaling that investors do not expect interest rate cuts; instead, they started pricing in interest rate increases this year.
The augment in WTI affects gold prices
West Texas Intermediate (WTI), the U.S. crude oil benchmark, is up almost 4% to $98.29 a barrel. Israel’s attacks on Iranian energy facilities sparked retaliation by the latter, which has hit energy infrastructure in Persian Gulf states such as Saudi Arabia, Qatar and Kuwait.
Last Wednesday, the Federal Reserve took a hawkish stance, with Fed Chairman Jerome Powell stating that unless he sees progress in disinflation, “I won’t see a rate cut.” Still, a scatter plot in the Summary Economic Outlook (SEP) showed that policymakers still expect interest rates to be cut due to the conflict in the Middle East.
On Friday, Federal Reserve Governor Christopher Waller told CNBC that he initially planned to support a rate cut based on the jobs report, but rising inflation changed his focus. He mentioned that persistently high oil prices could ultimately impact core inflation.
Fed Governor Michelle Bowman also disagreed, stating that she had made three rate cuts this year. She added that she expected sturdy economic growth and still saw a tender labor market situation.
The coming week’s U.S. economic calendar will include flash PMIs, the current account, jobless claims and wholesale inventories.
XAU/USD Technical Analysis: Gold Ready to Test $4,000 in Case of Break above $4,400 Level
The price of gold is hovering around $4,500 after breaking key support at the 100-day elementary moving average (SMA) at $4,581, which could pave the way for further declines. It is worth noting that the market structure continues to support a neutral to bullish bias, but a daily-weekly close below the February 2 cycle low of $4,402 would pave the way for breaking the 200-day SMA at $4,066.
In the low term, the dynamics have turned bearish, as illustrated by the relative strength index (RSI), which has crossed the neutral level since Monday and is now approaching the oversold area.
On the other hand, if the XAU/USD pair breaks above the 100-day SMA and reclaims $4,600, traders can expect a short-term retest of the 50-day SMA at $4,961.
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 favor 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 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.
