Gold recovers on increased safe-haven demand
- Gold has cushioned its decline as investors seek it out for its safe-haven qualities on Friday.
- Mounting geopolitical risks from multiple hotspots – China, Gaza and Ukraine – are sending investors fleeing for safety.
- Stronger-than-expected US data on Thursday sent Gold into a downward spiral as higher interest rates become normalized.
Gold (XAU/USD) puts in a temporary floor under the recent sell-off on Friday, trading a quarter of a percent higher at around the $2,330s, as a combination of market and geopolitical concerns lead investors to seek solace in its safe-haven qualities.
Gold retrenches on geopolitical concerns
The news that China has started a second day of war games around Taiwan, as well as the decision by Ireland, Norway and Spain to recognise the independent state of Palestine, have ratcheted up geopolitical tensions and impacted markets, helping drive demand for Gold.
Asian stocks are broadly lower on Friday, with the Hang Seng down 1.71%, the Shanghai Composite down 0.90%, and the Nikkie closing 1.36% lower. Investor concerns about high interest rates were a further factor weighing on sentiment.
Gold price weakened after US data
A slew of unexpectedly strong US economic data took its toll on the price of Gold on Thursday.
The higher-than-expected US Purchasing Manager Index (PMI) preliminary data for May, especially in the Services sector – which has been singled out as a major contributor to high inflation – has dialed back bets that the Federal Reserve (Fed) will implement early interest-rate cuts. This is negative for non-yielding Gold as it increases the opportunity cost of holding the precious metal.
India imports fall
The relatively high price of Gold may also be acting as a counterweight to demand in India, according to Reuters, who notes a fall in imports to the country as “high prices encourage retail customers to exchange old jewelry for new products”, reports FXStreet Editor Lallalit Srijandorn.
Technical Analysis: Gold breaks below major trendline
Gold price (XAU/USD) has decisively broken below a major trendline for the uptrend since February, ushering in a new more bearish technical atmosphere.
The steep decline from the all-time highs registered on Monday now suggests Gold is probably in a short-term downtrend, favoring short positions over longs.
XAU/USD 4-hour Chart
The penetration of the major trendline signals Gold will probably now fall to a conservative target at $2,303 (Fibonacci 0.618 extrapolation of the prior down move from $2,435 to $2,355) or all the way down to $2,272 (100% of the prior down move). The latter level is also the support from the May 3 lower high. A break below the $2,325 lows would provide confirmation of more downside to these targets.
The Relative Strength Index (RSI) became oversold and then reentered neutral territory on the previous bar, suggesting an increased chance of a pull back. It is also possible Gold could correct higher and return to the trendline in a throwback move before rolling over and going lower.
The precious metal’s medium and long-term trends are still bullish, suggesting the risk of a recovery remains high, yet price action does not suggest this is currently the case.
A decisive break back above the trendline at $2,360 would provide evidence of a recovery and reversal of the short-term downtrend.
A decisive break would be one accompanied by a long green bullish candle or three green candles in a row.
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.