Gold executes tame bounce as USD weakens on fading Trump trade
- Gold is up a quarter of a percent at the start of the week as the US Dollar slides lower.
- Gold, which is priced predominantly in USD, gets a lift from the Trump trade unwinding
- The US presidential election is too close to call, hedge funds are still long Gold and Iran saber-rattling boosts haven demand.
Gold (XAU/USD) makes a half-baked recovery to trade in the $2,740s on Monday amid a weakening US Dollar (USD), which helps Gold rise since the precious metal is mostly priced and traded in USD. This, and continued safe-haven demand from geopolitical risk, as well as the effect of long positioning by trend-following hedge funds, are all supporting Gold’s tepid bounce from within a familiar range stretching from around $2,709 to $2,759.
Gold rises as USD falls on “Trump trade” unwind
Gold gains a lift from a weakening US Dollar (USD) as traders reduce bets that former President Donald Trump will win the US presidential election. The Greenback rose during October as it was expected Trump’s inflationary policies would keep interest rates high in the US, increasing foreign capital inflows.
However, from the odds favoring a Trump come-back prior to the weekend, these have now moderated to “a coin toss-up”, according to election guru Nate Silver, and this uncertainty is further underpinning Gold price.
Speculation that the US Federal Reserve (Fed) could slash US interest rates by 50 basis points (bps) (0.50%) after the election, in the event of undue market volatility, as a “picker-upper”, could also be a potential factor supporting Gold price, since lower interest rates make the non-interest paying asset more attractive to investors.
This, and the news that Iran is planning to mount another attack on Israel in response to last month’s bombings, is adding to the geopolitical risk quotient. On Saturday, Iran's supreme leader, Ayatollah Ali Khamenei, told a student gathering that the US and Israel "will definitely receive a crushing response," according to the BBC.
Data from futures and options exchanges in the Commitment of Trader (COT) report is pointing to continued large trend-following trades from hedge funds, who have been chasing the rally higher. Whilst there has been a slight increase in shorts, according to Bart Melek, Head of Commodity Strategy at TD Securities, the weight of the trade remains long.
Technical Analysis: Gold back in a familiar range
Gold is edging higher on Monday from within the confines of its old range, stretching between $2,709 and $2,759.
Despite the sharp pullback at the end of last week, the precious metal remains in an overall uptrend on all time frames (short, medium and long), which, given the technical principle that “the trend is your friend,” tilts the odds in favor of more upside.
XAU/USD Daily Chart
A break above the $2,790 all-time high would probably lead to a move up to resistance at $2,800 (whole number and psychological number), followed by $2,850.
A deeper pullback, on the other hand, would find support at $2,709, the floor of the range. The overall uptrend, however, might well resume thereafter.
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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