Gold price hit a five-day high above the $2,400 figure amid an escalation of the Middle East conflict between Israel and Iran. An Israeli attack on Iran on Friday sent bullion toward its daily high of $2,417 a troy ounce as ebbs and flows flock to safety in the uncertainty of the outcome. However, the rally was short-lived as Tehran said it had no plans to retaliate.
XAU/USD trades at $2,394, registering gains of 0.70% after Golds seesawed $44.00 as traders digested Friday’s developments. Aside from this, the drop in US Treasury bond yields and the Greenback keeps the golden metal afloat. This is despite recent hawkish comments by Federal Reserve (Fed) officials, who have adopted a more neutral stance suggesting that the disinflationary process has stalled.
On Friday, Chicago Fed President Austan Goolsbee exited from its dovish stance and stated that the inflation progress had “stalled,” adding that “the Fed’s current restrictive policy is appropriate.” His words echoed comments made by Atlanta Fed’s Bostic and New York Fed’s Williams, who crossed the newswires on Thursday.
Bostic, one of the most hawkish members of the Federal Open Market Committee (FOMC), went beyond Goolsbee and Williams's comments, saying that the Fed wouldn’t reduce rates until the end of the year.
Gold price is upwardly biased, though it seems that buyers could be losing momentum as Friday’s spike to $2,417 was courtesy of risk aversion. The Relative Strength Index (RSI) remains at overbought levels, but it hasn’t surpassed the last peak, which means there’s a slight divergence between price action and momentum. That could pave the way for a pullback, but the most likely scenario is a continuation of the uptrend.
That said, XAU/USD's first resistance would be $2,400, followed by Friday’s high of $2,417. A breach of the latter will expose the all-time high of $2,431. On the other hand, if XAU/USD is headed for a correction, the first support would be the $2,350 mark, followed by the April 15 daily low of $2,324. Once surpassed, Gold might test $2,300.
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.
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