The price of gold (XAU/USD) fell below $4,350 during early European trading hours on Friday. The precious metal fell due to some long-term profit-taking and weak liquidation from short-term futures traders.
However, the potential downside for the yellow metal may be limited amid rising expectations for further interest rate cuts by the US Federal Reserve after US CPI inflation slowed unexpectedly in November. Lower interest rates can reduce the opportunity cost of holding gold, supporting the non-yielding precious metal.
In addition, geopolitical tensions between the United States and Venezuela, coupled with strong industrial and investment demand, could provide some support for safe-haven assets such as gold.
The longest federal government shutdown in U.S. history affected data collection for the inflation report. Traders will take further cues from the University of Michigan Consumer Sentiment Index for December, which will be released later on Friday.
Daily Summary Market Drivers: Gold declines despite Fed rate cut hopes
- The U.S. Consumer Price Index inflation rate fell to 2.7% in November, according to the U.S. Bureau of Labor Statistics (BLS) on Thursday. This reading was lower than market expectations of 3.1%.
- The US core CPI, which excludes volatile food and energy prices, rose 2.6%, below analysts’ estimates of a 3.0% increase.
- “A surprisingly sharp decline in U.S. consumer price inflation would set the stage for further Fed easing in 2026,” said Sal Guatieri, chief economist at BMO Capital Markets.
- US President Donald Trump said on Wednesday that the next head of the Federal Reserve will be someone who believes in lowering interest rates “significantly.” He also stated that he would soon announce a successor to current Fed Chairman Jerome Powell.
- Financial markets expect just a 26.6% chance that the Fed will cut interest rates at its next meeting in January, after it cut them by a quarter point at each of its last three meetings, according to the CME FedWatch tool.
- The New York Times reported on Thursday that the Venezuelan government had ordered its navy to escort ships carrying petroleum products from its port. This measure may escalate the risk of confrontation with the United States after Trump ordered a “siege” on the country’s oil industry.
Gold maintains its bullish bias and is expected to retest the record high
Gold is trading in negative territory during the day. According to the four-hour chart, the positive outlook for the precious metal remains intact as the price registers higher highs and higher lows, settling above the key 100-period EMA. Moreover, the Bollinger band is widening, and the 14-day RSI is above its center line, indicating that the path of least resistance is to the upside.
The first upward barrier for XAU/USD appears at the upper border of the Bollinger band at $4,352. A decisive break above this level would indicate that buyers are willing to enter and sustain the climb back to the all-time high at $4,381, on their way to the psychological level of $4,400.
On the other hand, if bearish candles start to appear and prices remain below the December 17 low at $4,300, sellers may gain momentum and pull gold towards the December 16 low at $4,271. To the south, the next competition level to watch is the 100-day moving average at $4,242.
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.
