Gold prices hit new record highs as multiple factors continue to drive safe-haven demand.
The Fed's dovish outlook has kept dollar bulls on the defensive and further supported gold/dollar.
Slightly overbought conditions and positive risk sentiment pose headwinds for the precious metal.
Gold prices (XAU/USD) entered a bullish consolidation phase after hitting new all-time highs during the Asian session on Thursday. Bulls appear reluctant to make new bets amid slightly overbought conditions and positive risk sentiment, which tends to weaken the safe-haven precious metal. However, any meaningful corrective decline still seems elusive given the growing uncertainty over U.S. President Donald Trump's trade policies and their impact on the global economy.
Apart from this, geopolitical risks and dovish expectations from the Federal Reserve (Fed) should provide support to the yield-free gold price. Meanwhile, the U.S. dollar (USD) struggled to gain any meaningful support earlier this week, hovering near its lowest level since October as markets bet that the Federal Reserve will soon resume its rate-cutting cycle. This could further limit the commodity's downside and call for caution before confirming a short-term top in gold.
Asian stocks tracked Wall Street's overnight gains, boosted by the Federal Reserve's decision to keep interest rates unchanged and maintain expectations of rate cuts this year. As widely expected, the U.S. central bank kept interest rates steady for the second consecutive meeting and said it would implement two 25 basis point rate cuts by the end of the year.
In addition, U.S. President Donald Trump and Russian President Vladimir Putin reached an agreement on Tuesday to immediately suspend strikes on energy infrastructure in the Ukraine war. In addition, Ukrainian President Vladimir Zelensky and Trump also agreed to work together to end the long-running Russia-Ukraine war, further boosting investor confidence.
Meanwhile, Federal Reserve officials cut their growth forecasts for this year amid heightened uncertainty about the impact of the Trump administration’s aggressive trade policies on economic activity. Trump has imposed a fixed 25% tariff on steel and aluminum since February and threatened reciprocal and industry tariffs, heightening fears of a global trade war.
Traders now see a greater than 65% chance that the Fed will resume rate cuts at its June policy meeting. This in turn has failed to help the dollar stage any meaningful rebound from the multi-month lows hit earlier this week and should provide some support to non-yielding gold prices amid the risk of further escalation of tensions in the Middle East.
The Israeli military said it had launched a limited ground incursion into Gaza following airstrikes on the Strip, breaking a two-month ceasefire agreed with Hamas. In addition, Israeli Prime Minister Benjamin Netanyahu warned that the war would intensify, which should continue to support the safe-haven precious metal and limit any corrective slide.
Traders are now looking forward to the latest monetary policy updates from the Bank of England and the Swiss National Bank. Later in the North American session, the US economic calendar will include the usual weekly initial jobless claims, the Philadelphia Fed manufacturing index and existing home sales data, which may bring short-term opportunities for gold/dollar.
The daily relative strength index (RSI) remains above 70, indicating overbought conditions and inhibiting bulls from making new bets. Therefore, it would be wise to wait for some short-term consolidation or a modest pullback before traders start positioning for a continued uptrend seen in the past three months or so. That said, the recent break above the psychological $3,000 level and the subsequent rally suggest that the path of least resistance for gold prices remains to the upside.
Meanwhile, any meaningful corrective decline could attract some dip buyers in the $3,023-3,022 area. This should help limit downside near $3,000, a level that should now act as a key pivot for short-term traders. A break below this level could trigger some technical selling and drag gold prices to the intermediate support of $2,980-2,978 and, in turn, towards the $2,956 area. The downside trajectory could extend further to the $2,930 support level before XAU/USD falls to the $2,900 mark and last week's lows, around the $2,880 area.
Gold has played a key role in human history as it is widely used as a store of value and medium of exchange. Currently, in addition to its lustre and use in jewellery, gold 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 debasement because it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. To support their currencies during turbulent times, central banks tend to diversify their reserves and buy gold to boost perceptions of economic and monetary strength. High gold reserves can be a source of trust in a country's solvency. According to the World Gold Council, central banks added 1,136 tonnes of gold to their reserves in 2022, worth about $70 billion. This is the highest annual purchase on record. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold is negatively correlated with the US dollar and US Treasuries, both of which are major reserve assets and safe haven assets. Gold tends to rise when the dollar weakens, allowing investors and central banks to diversify their assets during turbulent times. Gold is also negatively correlated with risky assets. A rally in the stock market tends to push gold prices lower, while a sell-off in riskier markets tends to favor gold.
Prices can move due to a wide variety of factors. Geopolitical instability or fears of a deep recession can quickly push gold prices higher due to its safe-haven status. As a low-yielding asset, gold tends to rise as interest rates fall, while higher funding costs usually weigh on gold. Still, since the asset is priced in U.S. dollars (XAU/USD), most moves depend on the performance of the U.S. dollar (USD). A strong dollar tends to control gold prices, while a weak dollar can push them higher.