Created
: 2024.09.18
2024.09.18 11:59
Gold price (XAU/USD) witnessed a modest pullback from the vicinity of the record high, around the $2,589-2,590 area touched the previous day, and ended in the red for the first time in the last four days on Tuesday. The downtick was led by some profit-taking, albeit lacking any follow-through as traders opted to wait on the sidelines ahead of this week's key central bank event risks before placing fresh directional bets. The Federal Reserve (Fed) will announce its decision at the end of a two-day meeting later this Wednesday, which will be followed by the Bank of England (BoE) meeting on Thursday and the Bank of Japan (BoJ) policy update on Friday.
In the meantime, the extensive pricing for an oversized interest rate cut by the Fed fails to assist the US Dollar (USD) in capitalizing on the overnight bounce from its lowest level since July 2023 and revives demand for the non-yielding Gold price. However, a 25 basis points (bps) rate cut could bode well for the USD and weigh on the commodity. That said, the risk of a further escalation of conflict in the Middle East, along with the US political uncertainty ahead of the November presidential election, could offer support to the precious metal and limit the downside. This, in turn, suggests that any corrective pullback might still be seen as a buying opportunity.
From a technical perspective, bulls might now wait for a move beyond the $2,589-2,590 region, or the all-time peak touched on Monday, before placing fresh bets. The subsequent move up has the potential to lift the Gold price above the $2,600 mark, towards testing the top boundary of a short-term ascending channel extending from sub-$2,400 levels touched late June. The said barrier is currently pegged near the $2,609-2,610 area, which if cleared decisively will confirm a fresh breakout and set the stage for an extension of the recent well-established uptrend.
On the flip side, some follow-through selling below the overnight swing low, around the $2,561-2,560 area, could pave the way for deeper losses towards the $2,530-2,525 strong horizontal resistance breakpoint. Any further decline is more likely to attract fresh buyers and remain limited near the $2,500 psychological mark. The latter should act as a key pivotal point, which if broken decisively could drag the Gold price to the $2,475-2,470 confluence - comprising the 50-day Simple Moving Average and the lower boundary of the aforementioned trend channel.
Gold has played a key role in human's history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn't rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country's solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
Created
: 2024.09.18
Last updated
: 2024.09.18
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