Gold (XAU/USD) extended losses on Friday after a edged two-day decline that pushed prices to their lowest level since early February, near the $4,500 level. The decline comes as global markets increasingly price in “higher for longer” interest rates following this week’s monetary policy announcements by major central banks.
At the time of writing, XAU/USD is trading around $4,580, off an intraday high near $4,735, and remains on track to post losses for the third straight year.
Gold loses luster as hawkish central banks tighten their grip
The Federal Reserve (Fed), Bank of Japan (BoJ), Swiss National Bank (SNB), Bank of England (BoE), Bank of Canada (BoC) and European Central Bank (ECB) kept interest rates unchanged, while the Reserve Bank of Australia (RBA) raised rates, with policymakers highlighting the risk of rising inflation from higher oil and energy prices amid the ongoing war in the Middle East.
Gold, despite being an inflation hedge and a secure asset, has difficulty attracting demand. Prices have fallen more than 10% since the outbreak of the U.S.-Israel war with Iran as concerns about oil-led inflation prompted traders to re-price global interest rates in a more hawkish direction, with recent central bank signals reinforcing that shift.
Market participants now expect the Fed to remain unchanged through 2026, compared with earlier bets of at least two rate cuts this year. It is currently estimated that the ECB will raise interest rates by July, and another one at the end of the year.
The BoE was previously expected to cut interest rates, but is now priced at around two increases this year. The BoJ remains on the path of gradual tightening of monetary policy. The BoC is expected to maintain interest rates, although persistent inflation may push the Ottawa-based institution to tighten monetary policy. Meanwhile, the RBA is expected to make further interest rate increases.
Higher interest rates boost the opportunity cost of holding gold, making yielding assets more attractive. Another factor affecting the metal is the much stronger US dollar (USD).
Since both gold and oil are priced in USD, rising energy prices tend to boost demand for the dollar, which in turn puts pressure on gold. Additionally, the dollar’s role as the world’s main reserve currency supports demand during periods of increased geopolitical uncertainty as investors seek liquidity and security.
At the same time, sinking expectations for Fed rate cuts have pushed up U.S. Treasury yields, further supporting the USD and increasing downward pressure on the unyielding metal.
Fed Governor Christopher Waller said Friday that a sustained rise in oil prices could have a lasting impact on inflation, not a ephemeral one. He added that while core inflation may be close to the Fed’s 2% target, tariffs maintain elevated price pressures. Waller also noted that he would support interest rate cuts later in the year if the labor market remains tender.
On the geopolitical front, tensions in the Middle East remain elevated with no clear signs of easing, although Israel has signaled it may refrain from further attacks on Iran’s energy infrastructure. Meanwhile, the Trump administration is considering plans to occupy or blockade Iran’s Kharg island to pressure Tehran to reopen the Strait of Hormuz, Axios reported on Friday, citing sources familiar with the matter.
Technical Analysis: The bearish trend is strengthening and the RSI is approaching oversold
On the daily chart, gold is trying to settle above the 100-day basic moving average (SMA) near $4,605 ​​after falling below the 50-day SMA near $4,979 earlier in the week, highlighting increasing selling pressure in the near term.
Momentum indicators continue to support the bearish outlook. The relative strength index (RSI) is hovering near 33, approaching oversold territory and increasing downward pressure. Meanwhile, the average directional index (ADX) is rising towards 20, suggesting that the current downtrend is gaining momentum after a period of weaker trend conditions.
On the other hand, a significant break below the 100-day SMA and Thursday’s low of $4,502 could expose the February 2 low of $4,402. A drop below this level would open the door to the 200-day SMA at $4,091.
On the other hand, if prices manage to stay above the 100-day SMA, gold could attempt to rebound towards the 50-day SMA at $4,979, with the psychological level of $5,000 acting as immediate resistance. A sustained move above this zone could pave the way towards $5,200, the key resistance level needed to revive bullish momentum.
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 exploit 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 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 forceful dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
