The price of gold (XAU/USD) is down around 0.20% early in the week on Monday as oil prices rise, increasing fears of an inflationary spiral that could discourage central banks, including the Federal Reserve (Fed), from lowering borrowing costs. The XAU/USD pair is trading at $4,734 after retreating from its intraday high of $4,750.
Bullion prices lose value as oil rises and Fed halts bets, making buyers cautious
Recently, bullion prices recovered some of their earlier losses when US President Donald Trump said that Vice President JD Vance had done a good job on Iran and was called by Iran, which is “very bad” about making a deal.
Trump added that Iran “has not agreed to no nuclear weapons,” adding that “we cannot allow any country to blackmail or extort the world” and that “we will get the nuclear materials back.”
Additionally, the dollar pared some of its earlier gains following Trump’s comments as the US dollar index (DXY), which measures the performance of a basket of six currencies against the US dollar, turned negative, losing 0.09% on the day to 98.61.
Meanwhile, the United States established a blockade of the Strait of Hormuz beginning at 10 a.m. EST on Monday, aimed at blocking Iranian-flagged ships and ships from other countries leaving Iranian ports.
Existing home sales fell to a nine-month low of 3.98 million in March, down 3.6% m/m, but the data was largely ignored in anticipation of a resolution to the U.S.-Iran conflict.
The Fed expected to keep policy unchanged
According to the president of the San Francisco Fed, Mary Daly, last week’s inflation report in the US was not a surprise to anyone. She said there was a better chance of keeping rates on hold rather than raising them, although she noted that “if inflation remains elevated for longer than expected, we will keep it steady until we are confident that we have done our inflation job.”
The March consumer price index (CPI) in the US increased by 3.3% y/y, which is almost 1% more than in February. Still, according to data from Prime Market Terminal (PMT), fears of a prolonged conflict in the Middle East have prompted investors to limit their dovish assumptions towards the Fed, expecting the central bank to remain faithful.
Fed interest rate probabilities
As a result, US Treasury yields are expected to remain higher, which will be a negative factor for gold prices. At the time of writing, US 10-year T bonds are down 1.5 basis points to 4.30%.
In the longer term, the US economic report will include a 4-week average of ADP employment changes, speeches by Fed officials, and the March Producer Price Index (PPI), which is expected to raise by 4.6% y/y.
XAU/USD Technical Outlook: Gold Bounces Off 20-Day and 100-Day SMA Confluent Support Zone
The gold price is trending higher over the medium term as it rebounds from intraday lows at $4,639, below the confluence of the 100- and 20-day basic moving averages (SMAs), each at $4,658-$4,668.
In the low term, the Relative Strength Index (RSI) has reached bearish levels, but if the index fails to break through the bottom at 44.76, bullion prices may be priced higher.
If XAU/USD clears the key psychological resistance at $4,750, it could open the door to higher prices, with the next resistance at $4,800. Above, further gains lie in the next area of ​​interest: the April 8 high of $4,857 ahead of the 50-day SMA of $4,897.
Conversely, if gold falls below $4,700, the challenge will be the confluence of the 20- and 100-day SMAs around $4,668/58 and then the $4,600 figure.
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 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. 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 forceful dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
