Gold prices rose despite mixed U.S. Purchasing Managers' Index (PMI) data and a slight rise in the U.S. dollar.
Investors await the Fed's interest rate decision and economic forecasts, with a 25 basis point rate cut expected on Wednesday.
Markets speculate on the Fed's future monetary policy and possible inflationary pressures from Trump's policies.
Gold prices rose slightly in the North American trading session at the beginning of this week, up 0.28%, as investors await the Federal Open Market Committee (FOMC) decision. At press time, XAU/USD was trading at $2,643, above the opening price but below the day's high.
The U.S. economic calendar was light with the release of the S&P Global Flash PMI data for December, which showed mixed results. Manufacturing activity weakened after improving last month, while the services sector recorded its highest reading in 2024.
The data boosted the U.S. dollar, which rose 0.07% to 107.01 according to the U.S. Dollar Index (DXY). Meanwhile, gold prices retreated from a session high of $2,664.
The Federal Reserve (Fed) will hold its last meeting of the year on December 17 and 18. The Fed is expected to cut interest rates by 25 basis points, but traders are looking to the release of the Summary of Economic Projections (SEP) to understand the path of interest rates through 2025.
Lower interest rates are generally positive for non-yielding metals. However, with the incoming Trump administration hinting at a possible inflation-biased fiscal policy, speculation is growing that the Fed may take a gradual stance.
Gold prices tend to rise in a low interest rate environment and higher geopolitical risks, but both have weakened recently.
The US economic calendar will include the release of retail sales, industrial production, the FOMC policy decision, and the core personal consumption expenditures (PCE) price index.
Gold prices plunged two basis points to 2.049% as US real yields came under pressure, which was positive for precious metals. The US 10-year Treasury yield fell two and a half basis points to 4.375%. The dollar index remained little changed at 107.05. The S&P Global Manufacturing PMI fell to 48.3 from 49.7 in December, below the expected 49.8. The S&P Global Services PMI rose to 58.5 from 56.1 in the same period, above the expected 55.7. The CME FedWatch tool shows that traders have set the probability of a quarter-point rate cut on Wednesday at 96%. For 2025, investors are betting that the Fed will cut interest rates by 100 basis points. Goldman Sachs analysts pointed out that the People's Bank of China "may increase gold demand during periods of weakness in its currency to boost confidence in its currency."
The gold price uptrend remains intact, but it is trading below last week's low and the 50-day simple moving average (SMA) of $2,670. The relative strength index (RSI) has fallen below the neutral line, indicating that bears are in control.
If gold prices fall below $2,650, the next support will be the 100-day moving average of $2,600. On further weakness, the next support level would be the August 20 high of $2,531. Conversely, if XAU/USD breaks above $2,650, the next resistance level would be the 50-day moving average of $2,670, followed by $2,700.
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 viewed 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 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 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. A rebound in the stock market tends to push gold prices lower, while a sell-off in riskier markets tends to favor gold.
The price can move due to a wide variety of factors. Geopolitical instability or fears of a deep recession can quickly push up the price of gold due to its safe-haven status. As a low-yielding asset, gold tends to rise as interest rates fall, while higher funding costs usually drag on gold. Still, since the asset is priced in U.S. dollars (XAU/USD), most movements depend on the performance of the U.S. dollar (USD). A strong dollar tends to control the price of gold, while a weak dollar can push it higher.