Gold (XAU/USD) erased earlier gains on Friday, as a stronger US Dollar (USD) dampened upward momentum, with the metal fluctuating within the familiar range that has defined price action this week.
At the time of writing, XAU/USD is trading near $4,215, with dovish Federal Reserve outlook continuing to provide a supportive backdrop, helping to cap the downside despite the intraday pullback.
The US dollar rebounded from previous lows after the US September personal consumption expenditures report provided no surprises. The core personal consumption expenditures index, the Fed’s preferred measure, rose 0.2% month-on-month, matching expectations, while the annual rate fell to 2.8% from 2.9%.
The headline PCE rate stood at 0.3% monthly, matching expectations and remaining unchanged from the previous month. On an annual basis, the index came in at 2.8%, in line with expectations and slightly higher than 2.7% in August.
Broadly flat inflation readings did little to change policy expectations, with markets still largely convinced that the Fed will cut interest rates at next week’s monetary policy meeting.
Market Drivers: Focus on Fed outlook and peace talks between Russia and Ukraine
- Personal income rose 0.4%, above expectations of 0.3%, while personal spending increased 0.3% in line with expectations, retreating from August’s rise of 0.5%. The preliminary University of Michigan survey improved in December, with the Consumer Confidence Index rising to 53.3 versus expectations of 52, up from 51, while the Expectations Index rose to 55 versus expectations of 51.2, also up from 51.
- Latest US labor data shows the ADP employment change index fell by 32,000 in November, sharply missing expectations for a 5,000 increase after a revised increase of 47,000 in October. Challenger job cuts fell to 71.3K from 153.1K, while initial jobless claims fell to 191K, beating expectations of 220K and down from 218K last week.
- These business indicators are among the few data points the Fed has ahead of its policy decision. Nonfarm payrolls for October and November will be released together on December 16, which comes after the meeting. The next major update ahead of the decision will be next week’s JOLTS Job Openings report.
- According to the CME FedWatch tool, markets are pricing in a roughly 87% probability of a 25 basis point rate cut at the monetary policy meeting on December 9-10.
- Elsewhere, geopolitical tensions remain in focus, with peace efforts between Russia and Ukraine making little progress. The Kremlin described recent talks with US envoys as “encouraging,” but key regional differences remain, raising uncertainty and providing a layer of support for safe-haven assets such as gold.
Technical Analysis: The XAU/USD pair needs to break the $4,250 level to regain momentum
XAU/USD continues to trade sideways after breaking out of the symmetrical triangle pattern, with no follow-up buying keeping upside attempts near $4,250.
On the 4-hour chart, the XAU/USD pair is hovering around the 21-period simple moving average (SMA), reflecting a neutral short-term bias. However, the broader uptrend remains in place and any declines are likely to attract buyers.
On the upside, a clear break above $4,250 is needed to revive bullish momentum, opening the door towards $4,300 and possibly a retest of the all-time high near $4,381.
On the downside, support is seen at the lower edge of the recent consolidation area around $4160-4170, followed by the 100-period simple moving average near $4141.
Momentum indicators paint a neutral to bullish picture. The Moving Average Convergence-Divergence (MACD) histogram is narrowing towards the zero line while remaining slightly negative, indicating fading downward pressure as the MACD line settles below the signal line near the midpoint. A Relative Strength Index (RSI) around 58 indicates steady momentum without strong directional conviction.
Frequently asked questions about gold
Gold has played a major role in human history as it has been widely used as a store of value and a medium of exchange. Currently, apart from its luster and use in jewellery, the precious metal is widely viewed as a safe haven asset, meaning it is a good investment during turbulent times. Gold is also widely viewed as a hedge against inflation and currency depreciation because it is not dependent on any specific issuer or government.
Central banks are the largest holders of gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase gold to improve the perceived strength of the economy and the currency. High gold reserves can be a source of confidence for a country’s solvency. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse relationship with the US dollar and US Treasuries, which are major reserve assets and safe havens. When the value of the dollar declines, 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 rise in the stock market tends to weaken the price of gold, while a sell-off in riskier markets tends to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession could cause the price of gold to rise rapidly due to its safe-haven status. As a lower-yielding asset, gold tends to rise as interest rates fall, while a higher cost of money usually negatively impacts the yellow metal. However, most of the moves depend on how the US Dollar (USD) behaves as the asset is priced in Dollars (XAU/USD). A stronger dollar tends to keep the price of gold in check, while a weaker dollar is likely to push gold prices higher.
