The price of gold (XAU/USD) fell more than 1% on Wednesday, losing for a second day in a week on concerns that hostilities between the US and Iran could escalate, sending energy prices and the US dollar higher.
Geopolitics weighs on gold as oil shock revives inflation fears
Tension in the Middle East has increased after Iran and the US exchanged fire near the Strait of Hormuz. US CENTCOM carried out “defensive attacks” on Iranian missile launchers and mine-laying boats. On the other hand, Tehran attacked US bases in Persian Gulf countries such as Kuwait, United Arab Emirates (UAE) and Saudi Arabia.
Oil prices rose as a possible resumption of negotiations appears only to come after Iran’s Fars news agency reported that talks had stalled, even as US President Donald Trump denied it.
This has raised concerns about disruptions in oil supplies threatening to trigger a second wave of inflation and forcing major central banks to raise interest rates.
West Texas Intermediate (WTI), the US crude oil benchmark, rose over 2.50%, providing a positive tailwind for the dollar. The US Dollar Index (DXY), which tracks the value of the dollar against six currencies, rose 0.32% to 99.53
Data from the US prevents the Fed from cutting rates
US employment data points to a forceful labor market, with the May ADP national employment index increasing by 122,000, exceeding the forecast of 117,000. This, along with Tuesday’s JOLTS report showing an enhance in job openings, paints a solid picture for U.S. employment ahead of the release of nonfarm payrolls data, which is expected to enhance by 85,000.
More recently, the ISM Services PMI rose from 53.6 to 54.5 in May as companies placed orders in anticipation of higher prices. The ‘Prices paid’ component increased from 70.7 to 71.3, showing that the energy shock is spreading to the services sector.
Meanwhile, New York Fed President John Williams said monetary policy was “exactly in the right place,” adding that he “sees no need to raise or lower interest rates at this time.”
Investors will be closely watching Dallas Fed President Lorie Logan’s speech and the release of the Fed Beige Book ahead of the June 16-17 meeting.
XAU/USD Technical Outlook: Gold’s downtrend continues below the 20-day SMA
Gold continues its downtrend, hitting four-day lows of $4,426, which may reach $4,400 sooner than $4,500. The momentum has turned slightly bearish, with price action printing a succession of lower highs and lows, closing near the 200-day elementary moving average (SMA) at $4,422, which if breached would pave the way for further losses.
The Relative Strength Index (RSI) is bearish and pointing lower, confirming that sellers are stepping in to lower gold prices.
If XAU/USD settles the 200-day SMA, look for a test of $4,400. Below this area is the current yearly low of $4,098, the daily low on March 23.
On the upside, Gold needs to recover $4,500 before testing the 20-day SMA at $4,573. Above this area is the 50-day SMA at $4,626, followed by the 100-day SMA at $4,794.
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. 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.
