Gold price trades with mild positive bias; lacks bullish conviction
- Gold price gained some positive traction on Monday amid modest US Dollar weakness.
- Bets that the Fed will cut rates again undermine the USD and benefit the XAU/USD pair.
- Concerns about Trump’s tariff plans and a global trade war also support the commodity.
Gold price (XAU/USD) kicks off the new week on a positive note and recovers further from over a three-week low, around the $2,833-2,832 region touched on Friday. Despite Friday's in-line US inflation data, traders continue to price in the possibility that the Federal Reserve (Fed) will cut interest rates by a quarter of a percentage point twice by the end of this year. This, along with the emergence of fresh selling around the US Dollar (USD), lends support to the non-yielding yellow metal.
Apart from this, concerns about the potential economic fallout from US President Donald Trump's tariff plans and geopolitical risk turn out to be other factors underpinning the safe-haven Gold price. However, the lack of follow-through buying warrants some caution before confirming that the XAU/USD's recent corrective pullback from the all-time peak has run its course. Traders might also opt to wait for this week's release of important US macro data scheduled for the beginning of a new month.
Gold price is underpinned by bets for more Fed rate cuts and a weaker USD
- The US Bureau of Economic Analysis reported on Friday that the Personal Consumption Expenditures (PCE) Price Index rose 0.3% in January and increased 2.5% over the past twelve months, down slightly from 2.6% in December.
- Adding to this, the core PCE Price Index, which excludes volatile food and energy prices, gained 0.3% last month and climbed 2.6% on a yearly basis in January, marking a notable deceleration from 2.9% in the previous month.
- The report further revealed that US consumer spending unexpectedly dropped 0.2% last month, marking the first decline since March 2023 and the biggest decrease in nearly four years, fueling worries about the US growth outlook.
- According to the CME Group's FedWatch Tool, market participants are pricing in the possibility that the Federal Reserve will resume cutting interest rates at the June policy meeting and lower borrowing costs again in September.
- This comes on top of worries that US President Donald Trump's trade tariffs would undermine consumer spending and fail to assist the US Dollar to capitalize on a three-day-old recovery move from over a two-month low.
- Trump confirmed that he will impose tariffs on Canada and Mexico starting Tuesday and announced plans to double the 10% universal tariff on imports from China, raising the risk of a global trade war and benefiting the safe-haven Gold price.
- Traders now look to the US ISM Manufacturing PMI for some impetus later this Monday. Apart from this, other key US macro releases, including the Nonfarm Payrolls report on Friday, should influence the near-term USD trajectory.
Gold price technical setup warrants caution before placing fresh bullish bets
From a technical perspective, last week's breakdown below the 23.6% Fibonacci retracement level of the December-February rally was seen as a key trigger for sellers. Moreover, oscillators on the daily chart have just started gaining negative traction, and back prospects for an extension of the corrective pullback from the all-time peak.
Hence, any subsequent move up might still be seen as a selling opportunity and remain capped near the $2,885 region. This is closely followed by the $2,900 mark, above which the Gold price could climb to the $2,934 intermediate hurdle en route to the record high, around the $2,956 region.
On the flip side, Friday's swing low, around the $2,833-2,832 zone, now seems to protect the immediate downside, below which the Gold price could fall to 38.2% Fibo. level, around the $2,815-2,810 region. Some follow-through selling below the $2,800 mark would suggest that the commodity has topped out and could pave the way for deeper losses.
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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