Gold prices reversed from more than a month high hit on Thursday.
Bets on a dovish Fed and rising U.S. Treasury yields weighed on zero-yielding gold.
Geopolitical risks, trade war concerns and bets on a December rate cut by the Fed could support gold/dollar.
Gold prices retreated sharply after hitting a more than a month high near $2,726 in Asian trading on Thursday, and now appear to have ended a three-day winning streak. Investors now appear to believe that the Federal Reserve (Fed) will take a cautious stance on rate cuts amid signs that progress in reducing inflation to achieve its 2% target has almost stalled. Markets maintain expectations of a dovish Fed, which continues to push up U.S. Treasury yields, which in turn boosts the dollar and drives funds out of zero-yielding gold.
In addition, the market maintains risk appetite, weighing on safe-haven assets, pushing gold prices down to the latest $2,700 mark. At the same time, the market now seems to have fully priced in the Fed's third consecutive rate cut next week. In addition, continued geopolitical risks caused by the Russian-Ukrainian war and the conflict in the Middle East, as well as market concerns about the upcoming trade tariffs imposed by US President-elect Donald Trump, may limit the decline of gold/dollar. Therefore, it is also worth investors to remain cautious until it is confirmed that the recent breakout momentum of commodities has been exhausted.
U.S. inflation data released on Wednesday were broadly in line with expectations, reinforcing market expectations that the Federal Reserve will once again lower borrowing costs at its upcoming policy meeting next week. The U.S. Bureau of Labor Statistics (BLS) reported that the consumer price index rose 0.3% month-on-month in November, the largest increase since April, and the annual rate rose to 2.7% from 2.6% in October. Other sub-items showed that core inflation, which excludes volatile food and energy prices, rose 0.3% month-on-month and 3.3% year-on-year. The Chicago Mercantile Exchange's FedWatch tool showed that the probability of the Federal Reserve cutting interest rates by another 25 basis points on December 18 soared to more than 98%, pushing gold prices to a more than one-month high on Thursday. Market expectations that the policies of U.S. President-elect Donald Trump will boost inflationary pressures and force the Federal Reserve to pause its rate-cutting cycle, boosting U.S. Treasury yields to a two-week high. This in turn boosted the dollar to maintain its recent strong gains, hitting a new monthly high, and coupled with the market's continued risk appetite, prompted some profit-taking in zero-yielding asset gold prices. Meanwhile, geopolitical risk premiums remain in play amid worsening Russia-Ukraine war and ongoing conflicts in the Middle East. Moreover, trade war concerns should help limit the losses in gold/dollar. Traders are now looking to Thursday's US economic data, the US Producer Price Index and the usual US Initial Jobless Claims for the week to bring some impetus in the late US session. However, the market will still be focused on the highly anticipated Federal Reserve monetary policy meeting next week, which will play a key role in determining the next move for non-yielding commodities.
From a technical perspective, the hourly RSI has turned down from slightly overbought. Moreover, oscillators on the daily chart have just started to gain bullish momentum, which in turn supports the prospect of some dip buying in gold prices. Therefore, any further weakness below the $2,700 mark may continue to find some support near the overnight swing lows (around $2,675-2,674). However, some follow-through selling may pave the way for further declines towards the $2,658-2,656 confluence (50 and 200 SMA on the 4-hour chart).
On the other hand, the Asian high near $2,726 seems to be an immediate resistance, and gold prices are expected to break through the $2,735 mark and test the $2,748-2,750 resistance zone. If gold prices continue to strengthen, it will open up space to challenge the all-time high (near $2,800 reached in October), with resistance at around $2,775.
Gold has played an important role in human history as it is widely used as a store of value and a medium of exchange. Currently, in addition to the attractive luster of gold and its use in jewelry, precious metals are widely regarded as safe-haven assets, which means that gold is seen as a good investment in turbulent times. Since gold is not dependent on any specific issuing institution or government, it is also widely seen as a hedge against inflation and currency depreciation.
Central banks are the largest holders of gold. In order to support their currencies in turbulent times, central banks tend to diversify their reserves and buy gold to increase the measurable strength of the economy and currency. Large-scale gold reserves can become a source of trust in a country's solvency. Data from the World Gold Council shows that central banks' gold reserves increased by 1,136 tons in 2022, equivalent to 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 has an inverse relationship with the U.S. dollar and U.S. Treasuries, which are both major reserve and safe-haven assets. Gold tends to rise when the dollar depreciates, allowing investors and central banks to diversify their assets during turbulent times. Gold also has an inverse relationship with risk assets. Rising stock markets tend to weigh on gold prices, while sell-offs in riskier markets tend to favor gold.
The price of gold can be affected by a variety of factors. Geopolitical instability or market concerns about a deep economic recession can cause the price of gold to rise rapidly due to its safe-haven status. As a zero-yielding asset, gold tends to rise with lower interest rates, while rising monetary costs usually drag down gold. However, since gold is priced in U.S. dollars (XAU/USD), most of its movements depend on the performance of the U.S. dollar. A strong dollar tends to weigh on gold prices, while a weak dollar can push gold prices higher.