Gold price strives for support as Middle East tensions de-escalate
- Gold price dips from fresh highs near $2,430 as investors don’t see Middle East tensions escalating further.
- US bond yields soar as the Fed seems to initiate the rate cut cycle from September.
- The US Dollar exhibits strength ahead of the monthly United States Retail Sales data for March.
Gold price (XAU/USD) struggles for a firm footing near $2,350 in Monday’s European session after posting hefty losses on Friday. The precious metal loses shine in the very-short term as investors expect that geopolitical tensions will not escalate further. United States President Joe Biden said that his nation will not support the counterattack from Israel on Iran.
Receding Federal Reserve (Fed) rate cut bets for the June and July meetings, combined with less fears of further escalating Iran-Israel tensions, have put some pressure on Gold. The 10-year US Treasury yields rally to 4.55% as Fed policymakers support keeping interest rates restrictive before they get convinced that inflation will return to the required rate of 2%. Higher bond yields weigh on the Gold price as they increase the opportunity cost of holding an investment in it.
The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, prints a fresh five-month high near 106.00 ahead of the monthly Retail Sales data for March, which will be published at 12:30 GMT. Robust spending by US households remains a major catalyst to higher inflation, allowing businesses to charge higher from consumers. The monthly Retail Sales are expected to have grown modestly by 0.3% compared to the prior reading of 0.6%.
Daily digest market movers: Gold price drops as investors see Isran-Israel tensions stalling
- Gold price retreats from fresh all-time highs near $2,430 as investors see Iran’s air strike on the Israeli state only as a retaliation to the attack on their embassy in Syria near Damascus. Tensions between Iran and Israel are not expected to escalate further as Tehran said, “the matter deemed to be closed.” However, should the Israeli regime make another mistake, Iran’s response will be considerably more severe, the Wall Street Journal reported.
- The statement from the United States that it will not support the counterattack from Israel has boosted confidence among investors that Middle East tensions will not escalate further. Over the weekend, Iran launched hundreds of drones and missiles aimed at Israel.
- Meanwhile, uncertainty over the Federal Reserve (Fed) pivoting to rate cuts has weighed heavily on Gold. Financial markets have shifted their expectations for Fed rate cuts to the September meeting as the United States Consumer Price Index (CPI) report turned out hotter than expected in March.
- San Francisco Fed Bank President Mary Daly said on Friday that there is no urgency to reduce interest rates. Daly added that there is still more work to do to ensure that inflation is on course to return to the desired rate of 2%. She also emphasised keeping interest rates restrictive as long as inflation is necessary to return to the 2% target.
- Separately, Boston Fed Bank President Susan Collins said she hopes demand will start slowing and will support bringing down inflation later this year. Collins said she forecasted two rate cuts in the latest dot plot, in which most Fed members projected the central bank reducing interest rates three times by year-end.
Technical Analysis: Gold edges down from fresh highs near $2,430
Gold price corrects from new all-time highs formed around $2,430. The precious metal faces pressure as momentum oscillators are overheated. The 14-period Relative Strength Index (RSI) drops slightly after peaking around 85.00. The near-term demand is intact as the RSI remains in the bullish range of 60.00-80.00. However, momentum oscillators are cooling down after turning extremely overbought.
On the downside, April 5 low near $2,268 and March 21 high at $2,223 will be major support areas for the Gold price.
Gold FAQs
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.