Gold price retreats on bleak interest-rate outlook
- Gold price retreats for the second consecutive day on the back of elevated interest-rate expectations.
- Fed policymakers are expressing a reluctance to lower interest rates until more progress has been made on beating inflation.
- Their views are echoed in other parts of the globe further weighing on the Gold price which is sensitive to interest rates.
Gold price (XAU/USD) trades lower by about a quarter of a percent in the $2,410s on Wednesday as a shift in the outlook for interest rates – both in the US and globally – weighs on the precious metal.
Recent comments from US Federal Reserve (Fed) policymakers repeated the mantra that insufficient progress had been made in bringing inflation down to the Fed’s 2.0% target to warrant a lowering of interest rates.
Their views weighed on the Gold price which, as a non-yielding asset, tends to perform poorly when interest rates are high due to the increased opportunity cost of holding Gold.
Gold price pulls back ahead of Fed Minutes
Gold price might be further impacted when the Fed releases the FOMC Minutes from its latest policy meeting on Wednesday at 18:00 GMT.
If the meeting minutes reflect a shift to a more hawkish stance amongst policymakers, Gold is expected to continue retreating.
The recent Reserve Bank of Australia (RBA) meeting Minutes revealed that officials at the RBA had discussed the possibility of raising rates – a notable shift in stance from previous meetings.
Technical Analysis: Gold price edges lower towards trendline support
Gold price (XAU/USD) edges down towards support from the green trendline, which reflects the short-term uptrend that began at the beginning of May.
The pair formed a Shooting Star Japanese candlestick pattern (shaded rectangle on the chart) on Monday, followed by a bearish close the following day, providing additional confirmation. The pattern is indicative of short-term weakness.
XAU/USD Daily Chart
If the pullback continues, Gold will probably fall to initial support at the green trendline at about $2,405. Further weakness could take it down to the dark grey upward-sloping trendline in the $2,360s.
However, the precious metal’s short, medium and long-term trends are bullish, and given the old adage that “the trend is your friend”, the odds favor an eventual recovery after the correction.
A break above the new $2,450 all-time high would likely continue the rally to the next target at the psychologically significant $2,500 level.
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.