Gold prices recovered slightly from one-week lows hit early Monday.
Geopolitical tensions, weak U.S. bond yields and a stronger dollar boosted gold prices.
Ahead of the Fed meeting, the market maintained bets on a dovish outlook for the Fed, which deserves caution from bulls.
In Asia, gold prices fell to a one-week low of $2,644-2,643 before fluctuating higher, and now seem to have interrupted the sharp correction from the more than one-month high hit last Thursday. The dollar opened weak on Monday amid a slight correction in U.S. Treasury yields. In addition, geopolitical risks and the uncertain policy outlook of U.S. President-elect Donald Trump are also boosting gold prices.
At the same time, investors now seem to believe that the Federal Reserve (Fed) will take a more cautious stance on rate cuts next year as there are signs that the process of reducing inflation to the 2% target has stalled. This will be a positive factor for U.S. bond yields and the dollar, thus preventing gold prices from rising. Traders may also avoid making aggressive directional bets, opting to wait for the outcome of the highly anticipated two-day U.S. Federal Open Market Committee (FOMC) policy meeting on Wednesday.
Israel agreed on a plan to allocate state funds to expand its presence in the occupied Golan Heights and double its population, raising the risk of further escalation of tensions in the region. Israeli strikes in Gaza killed at least 53 Palestinians, while the Israeli military said its air force and ground forces killed dozens of militants in the northern part of the enclave and captured others. NATO Secretary-General Mark Rutte warned that Russian President Vladimir Putin wants to wipe Ukraine off the map and the rest of Europe could be next. Israeli fighter jets targeted missile launchers in southern Syria and carried out air strikes on radars in eastern Syria, the Syrian Observatory for Human Rights said. Traders are pricing in a more than 93% probability of the Federal Reserve cutting borrowing costs by 25 basis points on Wednesday, the CME FedWatch tool showed. Last week's release of the US Consumer Price Index (CPI) and Producer Price Index (PPI) reinforced expectations that the Federal Reserve will slow the pace of its rate-cutting cycle next year. The 10-year Treasury yield rose to a three-week high on Friday as markets bet that the Fed will not be so dovish, which should prevent gains in zero-yielding gold. The economic calendar on Monday will see the release of global purchasing managers' indices (PMIs), which may affect broader risk sentiment and boost gold prices. However, the focus will be on the crucial Fed decision on Wednesday. Traders will also take cues from the accompanying policy statement and the speech of Fed Chairman Jerome Powell.
From a technical perspective, the lows of the Asian session, around $2,644-2,643, happen to be a congestion area. Some follow-through selling could push gold prices closer to the $2,625 area, and then to the monthly lows around $2,614 and the key support level of $2,605-2,600. A clear break below this level would be seen by bears as a new trigger point and open up space for further declines.
On the other hand, the $2,665-2,666 area now appears to be an immediate barrier before the $2,677 area, and gold prices may recapture the $2,700 round mark after breaking through this level. If it rises later, gold prices may further strengthen to the high of the monthly range, which is around $2,726, and if it breaks through this area clearly, it will open up space for further strength in the near term.
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, the precious metal is widely regarded as a safe haven asset, 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 regarded as a hedge against inflation and currency depreciation.
Central banks are the largest gold holders. To support their currencies during turbulent times, central banks tend to diversify their reserves and buy gold to increase the measurable strength of the economy and currency. Large gold reserves can be a trusted source of 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 US dollar and US Treasuries, which are all major reserve and safe-haven assets. When the US dollar depreciates, gold tends to rise, allowing investors and central banks to diversify asset risks during turbulent times. Gold also has an inverse relationship with risky assets. Stock market gains tend to suppress gold prices, while sell-offs in riskier markets often benefit gold.
The price of gold is affected by a variety of factors. Geopolitical instability or market concerns about a deep economic recession will cause the price of gold to rise rapidly due to gold's safe-haven status. As a zero-yielding asset, gold tends to rise with lower interest rates, while rising monetary costs usually weigh on gold. However, since gold is priced in U.S. dollars (XAU/USD), most of its moves 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.