Gold prices struggled to capitalize on the previous day's upside amid mixed fundamental signals.
Ongoing US recession fears and Fed rate cut bets weighed on the dollar, supporting the gold/dollar pair.
Positive risk sentiment limited gains for the precious metal, with traders eagerly awaiting Friday's US personal consumption expenditure data.
Gold prices (XAU/USD) traded comfortably above the psychological $3,000 mark for a second day on Wednesday, though still below the previous day's swing high. Ongoing uncertainty over US President Donald Trump's so-called reciprocal tariff plan for next week continued to support the safe-haven metal. Meanwhile, dollar bulls were on the defensive amid disappointing US macro data on Tuesday, acting as another tailwind for the precious metal.
Moreover, market bets that the Federal Reserve (Fed) will soon resume its rate-cutting cycle further supported non-yielding gold prices amid U.S. recession fears. However, the generally positive risk sentiment acted as a headwind for the safe-haven gold/dollar pair. Traders also chose to wait ahead of the release of the U.S. personal consumption expenditures (PCE) price index to position for further gains. Nonetheless, the fundamental backdrop suggests that the path of least resistance for gold is to the upside.
The dollar retreated to a near three-week high after data released on Tuesday showed that the Conference Board’s U.S. consumer confidence index fell for the fourth straight month, dropping to a four-year low of 92.9 in March. The survey also showed that the expectations index fell to 65.2, the lowest in 12 years and well below the 80 threshold that typically signals a recession.
This comes against the backdrop of the Federal Reserve downgrading its growth outlook last week amid uncertainty over the impact of U.S. President Donald Trump’s trade policies. In addition, reports that reciprocal U.S. tariffs, set to be implemented on April 2, will be more targeted helped ease inflation concerns and should allow the U.S. central bank to continue cutting interest rates, benefiting non-yielding gold prices.
In fact, the Fed has indicated that it will implement two 25 basis point rate cuts by the end of the year. However, the market is pricing in the possibility that the Fed may reduce borrowing costs at its policy meetings in June, July and October. This overshadowed hawkish comments from Fed Governor Kugler, who expressed support for keeping interest rates stable for a period of time.
Meanwhile, Trump imposed secondary tariffs on Venezuela and said any country that buys oil or gas from Venezuela will face a 25% tariff when trading with the United States. In addition, Trump is expected to announce so-called retaliatory tariffs - which will offset the levies on U.S. goods and are set to take effect on April 2, covering about 15 major U.S. trading partners, keeping investors on edge.
Russia and Ukraine reached an agreement mediated by the United States to stop military strikes on the Black Sea and energy infrastructure. Apart from this, the latest optimism about China's stimulus consumption still supports the general positive sentiment in the stock market. This prevents the gold/dollar bulls from making aggressive bets.
Traders now look forward to the release of US durable goods orders data on Wednesday, which, along with speeches by influential FOMC members, should provide some impetus to the dollar and commodities. However, the focus will remain on the US personal consumption expenditures (PCE) price index, which may provide clues on the Fed's rate cut path and boost precious metals.
From a technical perspective, the bullish resilience of gold prices around $3000 and the subsequent upward move, coupled with positive oscillators on the daily chart, suggest that the path of least resistance for gold prices is to the upside. Further buying above the overnight swing high around $30036 would confirm the constructive outlook and push the gold/dollar pair towards the all-time high of $3057-3058 area hit last week.
On the other hand, the $3000 mark should continue to protect the immediate downside for gold prices and serve as a key turning point. A break below this level could trigger some technical selling and drag the gold/dollar pair to the $2,982-2,978 area. The corrective decline could extend further to the next relevant support level near $2,956-2,954.
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 considered 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 as 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 the perception of economic and monetary strength. High gold reserves can be a source of confidence in a country's solvency. According to the World Gold Council, central banks added 1,136 tons of gold 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 U.S. dollar and U.S. Treasuries, both of which are major reserve assets and safe havens. Gold tends to rise when the dollar depreciates, allowing investors and central banks to diversify their assets during turbulent times. Gold is also negatively correlated with risky assets. Stock market rebounds tend to push gold prices lower, while sell-offs in riskier markets tend to benefit gold.
Prices can move due to a wide variety of factors. Geopolitical instability or concerns about a deep recession can quickly push up gold prices 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 gold prices higher.