The price of gold (XAU/USD) rose more than 3% on Friday as dip buyers emerged as the conflict entered its fifth week of hostilities with no signs of de-escalation and as inflationary pressures mounted. At the time of writing, XAU/USD is trading at $4,510 after rebounding from intraday lows of $4,375.
Increased geopolitical tensions underpin gold, oil and the US dollar
Market sentiment remains gloomy as US stocks fall to seven-month lows. The rise in US treasury bond yields and the mighty US dollar were no excuse for bullion buyers to drive up prices amid growing uncertainty about the conflict in the Middle East.
The US dollar index (DXY), which measures the dollar’s performance against six other indices, rose 0.30% to 100.16, supported by rising US yields. US 10-year T bonds rose almost two basis points to 4.428%.
Over the past two days, geopolitical headlines have driven price action. On Thursday, US President Donald Trump calmed the markets by delaying the pause in attacks on Iranian energy installations until April 6.
Nevertheless, the White House is sending mixed signals as the Wall Street Journal reports that the Pentagon is deploying an additional 10,000 troops to the region.
As a result, investors ignored Trump’s attempts to de-escalate the conflict, as evidenced by skyrocketing energy prices, with the price of WTI rising almost 5% to $98.33 per barrel.
Recently, Iran’s Islamic Revolutionary Guard Corps declared that the Strait of Hormuz was closed.
US economic data
On the data side, the University of Michigan revealed that US households are increasingly gloomy about economic conditions. Consumer sentiment in March fell from 55.5 to 53.3, below forecasts of 54. Inflation expectations for the next twelve months increased from 3.4% in February to 3.8%, while remaining unchanged at 3.2% over the five years.
Money markets currently expect that the next move by the Federal Reserve (Fed) will be to raise interest rates, given the current scenario of high energy prices. So far, investors have priced in six basis points of year-end tightening, Prime Market Terminal revealed.
The Fed’s Barkin says it is “prudently maintaining interest rates,” Paulson remains neutral
Richmond Fed President Thomas Barkin favors keeping interest rates on hold while waiting for more clarity on the next move. Rapid advances in artificial intelligence have clouded the economic outlook, he said, while adding that before the oil shock, inflation had already stalled.
Anna Paulson of Philadelphia recently offered a neutral stance, saying the job market is “fragile.” Paulson added that the war in Iran is putting pressure on the dual mandate and that “inflation levels are still too high.”
XAU/USD Technical Outlook: Gold Rally Capped Ahead of 100-Day SMA
The gold price consolidates on Friday, unable to overcome key resistance around $4,560, which could open the door to further gains. It is critical to note that momentum remains bearish as indicated by the Relative Strength Index (RSI), but the index has broken through its previous high, suggesting that sellers are losing strength.
If XAU/USD rises above Thursday’s high of $4,544, it could open the door to breaking the 100-day uncomplicated moving average (SMA) at $4,605, which is seen as the next area of ​​concern. Next up is the March 20 intraday high of $4,736, followed by $4,800.
On the other hand, if the gold price closes below $4,500 daily, the next support will be the March 24 daily low of $4,306, followed by the March 23 low of $4,098.
(This story was corrected March 27 at 19:05 GMT to remove information that US President Donald Trump had delayed attacks on Iranian energy facilities an additional day earlier on Friday.)
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 safe and sound 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 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 mighty dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
