Gold price declines as market sentiment improves
- Gold price declines on positive risk appetite, denting safe-haven demand.
- Gold rose strongly on Wednesday after the Federal Reserve adopted an overall easing bias in its May meeting.
- The precious metal was propelled higher after Federal Reserve Chairman Jerome Powell described more rate hikes as “unlikely”.
The Gold price (XAU/USD) is trading in the $2,290s on Thursday after falling almost a percentage point on reduced safe-haven demand. Market sentiment is overall positive as Asian stocks on balance closed higher and Oil prices hover at seven-week lows.
Gold price rallies after Federal Reserve meeting
Gold price surged over $30 an ounce after the US Federal Reserve (Fed) adopted an overall easing bias at its May policy meeting on Wednesday.
Gold bulls bid up the price after the Fed decided to leave interest rates unchanged and to slow the pace of reduction of its US Treasury holdings, a mildly dovish move as it unwinds quantitative tightening.
Yet the Fed also added a hawkish phrase to its statement to reflect the continued stubbornness of US inflation, saying that, “in recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.”
Concerns, however, that the Fed might actually consider raising interest rates – something that would be detrimental to non-yielding Gold – were allayed after the Federal Reserve Chairman Jerome Powell described such a move as “unlikely”.
In his prepared remarks, Powell dropped any reference to reducing interest rates this year, and sidestepped questions about whether the Fed would still be cutting rates in 2024, in the Q&A. Yet, although the overall take-away was that rates were not coming down any time soon, additional rate-hikes were not on the table either.
Technical Analysis: Gold price possibly unfolding Measured Move
Gold price (XAU/USD) has fulfilled the minimum requirement for completing its bearish Measured Move price pattern after hitting the Fibonacci 0.681 price objective for the final C wave at $2,286. This could mean prices will now track higher.
XAU/USD 4-hour Chart
Measured Move patterns are composed of three waves that trace out a zig-zag. The end of the final C wave can be estimated based on the length of wave A. It is usually either equal in length to A or a Fibonacci 0.681 ratio of A.
Directionally, Gold is in a bit of a no-man’s land: a break below the 0.681 Fibonacci target lows at $2,285 would be needed to confirm more downside to a target at $2,245 (1.000 or where A=C).
Alternatively, a break above the cluster of Moving Averages and the peak of wave B at around $2,350 would potentially usher in a new more bullish environment. This could then see a retest of the $2,400 highs.
Additionally, the trend for Gold price is up both in the medium and long-term, overall supporting the outlook.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.