Gold price (XAU/USD) drops after facing selling pressure near the crucial resistance of $2,400 in Tuesday’s European session. The precious metal comes under pressure as the US Dollar and Treasury yields extend their upside after strong March United States Retail Sales data added to doubts about when the Federal Reserve (Fed) will deliver an initial rate cut.
10-year US Treasury yields rise to 4.63%, refreshing a five-month high. Financial markets anticipate that the Fed will begin reducing its key borrowing rates from September. Also, traders see only two cuts instead of three as projected by the majority of Fed policymakers in the latest dot plot. The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, rises to 106.30.
Higher bond yields weigh on Gold as they increase the opportunity cost of investing in it. However, Gold has performed strongly in the past few weeks despite rising bond yields amid geopolitical tensions in the Middle East region. As a safe-haven asset, Gold demand from investors and central banks increases at times of global economic uncertainty and worsening geopolitical tensions.
Gold price falls back after failing to recapture fresh lifetime highs near $2,430. The upside in the precious metal remains limited as momentum oscillators are cooling down after turning extremely overbought. The 14-period Relative Strength Index (RSI) on the daily chart drops slightly after peaking around 85.00. The broader-term demand is intact as the RSI remains in the bullish range of 60.00-80.00.
On the downside, April 5 low near $2,268 and March 21 high at $2,223 will be major support areas for the Gold price.
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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