On Tuesday, gold prices (XAU/USD) were trading with an upward trend due to hopes for the de-escalation of the conflict in the Middle East. However, price action remains trapped in the price range of a week ago, reflecting indecision among traders amid mixed signals on geopolitical developments and changing expectations about the Federal Reserve’s (Fed) monetary policy path.
At the time of writing, the XAU/USD rate is trading around $4,618, up almost 2.30% on the day. The US Dollar Index (DXY), which tracks the value of the dollar against a basket of six major currencies, is trading near 100.12 after hitting a ten-month high of 100.64.
Middle East headlines keep markets cautious
The Wall Street Journal reported on Tuesday that Donald Trump has decided he is willing to end the U.S. military campaign against Iran even if the Strait of Hormuz remains largely closed, raising hopes that the conflict could end soon.
However, the report also indicated that he had decided that the United States should continue to achieve its primary goals of degrading Iran’s naval and missile capabilities and continue diplomatic pressure to restore trade flows while maintaining heightened tensions.
Iran’s Islamic Revolutionary Guard Corps (IRGC) has warned that it may attack US companies in the region from April 1 in retaliation for recent attacks.
Meanwhile, a parliamentary committee in Iran has approved plans to impose fees on shipping through the Strait of Hormuz, Fars news agency reports, citing the Islamic Revolutionary Guard Corps.
Unfavorable macro conditions weigh on gold
As the war escalates and oil prices remain high, fueling inflation fears, gold is not behaving like a typical sheltered haven or inflation hedge. Instead, price action is being driven by higher, longer-term interest rate expectations around the world and sustained demand for the dollar, with the metal now on track to record its worst monthly decline since October 2008.
At the same time, markets are starting to withdraw earlier expectations for interest rate increases as investors become increasingly concerned that rising oil prices could sluggish economic growth even if they keep inflation high, creating a policy dilemma for major economies.
According to the CME FedWatch Tool, markets expect the Fed to keep interest rates unchanged at 3.50-3.75% through 2026. A higher interest rate environment reduces the attractiveness of non-yielding assets such as gold.
In the near term, the gold price is likely to remain in a trading range with a slight downward bias, unless a clear end to the US-Iran conflict leads to a significant decline in oil prices and a change in interest rate expectations.
Technical Analysis: XAU/USD Breakout Above $4,600
From a technical perspective, the XAU/USD pair appears slightly bullish in the near term. An ascending triangle is forming on the 4-hour chart, suggesting increasing upward pressure. The spot is currently trading above the 50-period elementary moving average (SMA) at $4,494, which represents immediate support.
The relative strength index (RSI) remains above the 50 level, signaling upside momentum is building, while the moving average convergence divergence (MACD) remains positive, with the MACD line above the signal line, and the moderately positive histogram suggests that buyers remain in control of the current move.
On the other hand, a clear break above the upper boundary of the triangle, near the $4,600 zone, could open the door to a move towards the 100-period SMA at $4,773.
On the other hand, a break below the 50-period SMA at $4,494 could find support in the $4,300-$4,400 zone, followed by a March low near $4,100.
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 employ 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 sheltered 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. 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.
