The price of gold (XAU/USD) fell 0.5% to close to $4,052.00 during the European trading session on Thursday. The yellow metal faces selling pressure as traders trim their bets supporting an interest rate cut by the Federal Reserve at its December policy meeting.
The CME FedWatch tool shows that the likelihood of the Fed cutting interest rates by 25 basis points to 3.50%-3.75% at its December meeting has narrowed to 32.8% from 50.1% seen on Tuesday.
The scenario of the Fed keeping interest rates steady bodes poorly for non-yielding assets, such as gold.
The Fed’s dovish bets eased significantly on Wednesday after the release of Federal Open Market Committee (FOMC) minutes for its October meeting, which showed signs that policymakers are uncomfortable with the option of cutting interest rates at the December meeting.
“Most participants indicated that further interest rate cuts could increase the risk that higher inflation will take hold or could be misinterpreted as failure to adhere to the 2% inflation target,” according to the FOMC meeting minutes.
Meanwhile, investors are bracing for a significant price movement in the price of gold, as US non-farm payrolls data for October is scheduled to be published at 13:30 GMT. Official employment data will influence market expectations about the Fed’s monetary policy outlook.
Technical analysis of gold
Gold price is fluctuating widely near the 20-day exponential moving average (EMA) near $4,053, indicating a sideways trend.
The 14-day Relative Strength Index (RSI) is trading within a range of 40.00-60.00, indicating indecision among investors.
Looking down, the October 28 high near $3,888.62 will serve as major support for the gold price. On the upside, the all-time high near $4,380 will be the major resistance level.
Gold daily chart
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.
