Gold price soars as geopolitical tensions increase safe-haven demand
- Gold prices rose as investors turned to safe havens due to escalating geopolitical risks.
- US Treasury yields declined, and a weaker US Dollar contributed to the rise in gold prices.
- Sentiment turned sour following Putin's nuclear doctrine approval and mixed signals from Russian officials.
Gold posted back-to-back positive days of gains, climbing some 0.70% on Tuesday due to risk aversion amid heightened tensions in the Russia-Ukraine conflict. Market players seeking safety flock to the golden metal, which has risen above $2,600 after dipping to a two-month low of $2,536.
The XAU/USD trades at $2,629 at the time of writing. Falling US Treasury yields, and a soft US Dollar lifted the golden metal amid a scarce economic docket. However, precious metals rose due to geopolitical risks following Russia’s massive attack on Ukraine, while US President Joe Biden authorized the use of America-made long-range missiles inside Russia.
According to TASS, Russia’s President Vladimir Putin approved the nuclear doctrine in retaliation. This triggered a risk-off sentiment, with global equities dropping while Greenback and Gold advanced.
Lately, Russian Foreign Minister Lavrov stated that his country believes nuclear war will not happen.
Aside from this, the US economic schedule revealed that US housing data for October missed the mark, while Kansas City Fed President Jeffrey Schmid crossed the wires.
Schmid said it remains uncertain how far rates would need to fall, but it is reassuring that the decisions were taken amid growing confidence that the Fed is on track to achieve its 2% goal.
The Fed is expected to lower borrowing costs for the third straight meeting in December. Nevertheless, recent data has witnessed investors trimming the odds from a 62% chance of an imminent cut of 25 basis points (bps) to 58%, according to CME FedWatch Tool data.
Ahead of this week, the US economic schedule will feature Initial Jobless Claims, S&P Global Flash PMIs, and the University of Michigan (UoM) final reading of Consumer Sentiment for November.
Gold shines despite a firm US Dollar
- Gold prices recover as US real yields, which inversely correlate with bullion, fall three basis points to 2.05%.
- The US Dollar Index (DXY), which tracks the buck's performance against a basket of six currencies, is flat at 106.17.
- Market players continued to digest Donald Trump’s victory in the US Presidential Election on fears that tariffs and lower taxes are potential drivers of inflation and might slow the Fed’s easing cycle.
- US Treasury bond yields were also pressured ahead of the weekend, with the 10-year benchmark rate down two basis points to 4.39%.
- US Building Permits in October improved compared to September but dropped -0.6%, from 1.425 million to 1.416 million.
- Housing Starts for the same period tumbled for the third consecutive month, contracted by 3.1%, from 1.353 million to 1.311 million.
- According to data from the Chicago Board of Trade via the December fed funds futures contract, investors are pricing in 24 basis points of Federal Reserve rate cuts by the end of 2024.
- On Monday, US President Joe Biden authorized Ukraine's use of long-range missiles inside Russia, CNN revealed. The decision comes as a reaction to thousands of North Korean troops being deployed in support of Moscow’s war effort.
Gold price recovers as buyers target 50-day SMA
Gold price uptrend remains intact, with buyers gathering steam as the golden metal approaches the 50-day Simple Moving Average (SMA) at $2,655. On further strength, XAU/USD could rise and challenge the November 7 high of $2,710, followed by the psychological $2,750 mark.
On the flip side, if Gold drops below the 100-day Simple Moving Average (SMA) at $2,550, sellers could target the November 14 swing low of $2,536. Once cleared, XAU/USD's next stop would be $2,500.
The Relative Strength Index (RSI) remains bearish, but it is closing into the neutral line, indicating that Gold buyers are gathering short-term momentum.
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.
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