The price of gold (XAU/USD) remains near $3,985 after Wednesday’s losses during Thursday’s European trading session. The yellow metal remains under intense pressure as investors seem confident that the next monetary policy move by the Federal Reserve (Fed) will be favorable.
According to CME’s FedWatch tool, the likelihood of the Fed raising interest rates this year is almost 82%. However, the possibility of at least two interest rate increases is 42.2%.
The Fed’s higher interest rate scenario bodes poorly for non-yielding assets like gold.
Sentiment towards a hawkish Fed has intensified as both headline and core inflation have accelerated over the past few months amid higher energy prices.
For recent information on the current state of inflation, investors are waiting for the US Consumer Expenditure Price Index (PCE) data for May, which will be released at 12:30 GMT. U.S. core PCE inflation, the Fed’s preferred measure of inflation, is expected to reach a higher level of 3.4% from 3.3% in April. On a monthly basis, core inflation is estimated to have increased by 0.3%, faster than the previous reading of 0.2%.
Gold technical analysis
XAU/USD is falling to around $3,985.26, extending its decline below the near-term trend, while the 20-day exponential moving average (EMA) around $4,247 is currently capping the upside.
The short-term tone remains bearish, with price firming well below this lively barrier, while the Relative Strength Index (RSI) of around 30 is in oversold territory, suggesting the downside momentum is extended but not yet reversed.
On the other hand, initial resistance is at the March 23 low near $4,100 followed by the 20-day EMA near $4,247, and a daily close above this level would be necessary to ease immediate selling pressure and suggest a more significant recovery attempt. On the other hand, the gold price may continue its decline towards the October 28 low of $3,886.62 and then the September 23 high of $3,791.12.
(The technical analysis for this story was written with the assist of an AI tool.)
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 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 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. Still, most of the movements depend on the behavior of the US dollar (USD) when the asset is priced in dollars (XAU/USD). A robust dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
