Gold prices fell for a second consecutive day as traders locked in gains and the dollar strengthened.
Fed officials took a cautious approach, saying there was no rush to cut interest rates due to uncertainty over Trump's tariffs.
Geopolitical risks escalated as Israel stepped up its attack on Gaza, ending a two-month ceasefire and heightened market tensions.
Gold prices fell for a second consecutive day but are still expected to end the week in the green amid a generally stronger US dollar (USD) and traders locking in profits before the weekend. XAU/USD traded at $3,019, down 0.81%.
Market sentiment remains subdued, but US stocks are paring some of their earlier losses. Gold remained defensive as the dollar seemed to find support, with the U.S. Dollar Index (DXY) standing at 104.05, up 0.24%.
The lack of catalysts kept traders focused on the main driver of the market, which is President Donald Trump's trade policy. Beyond that, even news from Federal Reserve (Fed) officials failed to have an impact on gold prices.
New York Fed President John Williams commented that the central bank's 2% target is not up for debate or discussion, adding that the current moderately restrictive monetary policy is "perfectly appropriate." Later, Chicago Fed President Austan Goolsbee said that when there is a lot of uncertainty, one must wait for things to become clear.
The comments from policymakers complemented Powell's statement that the Fed is not in a rush to cut interest rates. This suggests that officials are comfortable with the level of interest rates. However, they expressed continued uncertainty about the economy's response to certain recently imposed import tariffs.
On Wednesday, Fed officials updated their forecasts for interest rates, projecting two rate cuts in 2025, while also lowering economic expectations.
On geopolitics, Israel announced an escalation of hostilities in Gaza to pressure the release of remaining hostages, effectively abandoning a two-month ceasefire and launching an attack on Hamas.
Rising U.S. Treasury yields weighed on precious metals. The U.S. 10-year Treasury yield rose one basis point to 4.246%.
U.S. real yields, as measured by the U.S. 10-year Inflation-Protected Treasury yield, which is inversely correlated with gold prices, rose nearly 2 basis points to 1.918%.
The Summary of Economic Projections shows that Fed officials expect two rate cuts in 2025, with the federal funds rate forecast remaining at 3.9%, in line with the December forecast. The Fed's preferred inflation measure, the PCE price index and unemployment rate, were revised higher, while GDP growth is now expected to be below 2%, pointing to an economic slowdown associated with President Donald Trump's trade policies.
Money markets have priced in a 72 basis point rate cut by the Fed in 2025, which has led to a sharp drop in Treasury yields and the dollar.
The gold price trend remains upward. However, unless buyers push the price above Friday’s open of $3,043, a pullback is likely. Momentum remains bearish, as the relative strength index (RSI) fell for the second day in a row, clearing the previous high on the index. This suggests that bears are in control.
If XAU/USD falls below $3,020, the next support level will be $3,000. Once it breaks, the next focus will be the daily high of $2,954 on February 20, followed by $2,900.
Conversely, a break above $3,050 could open the way to the $3,100 resistance zone.
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.