Gold prices retreated from close to weekly highs during the North American session on Wednesday amid an improvement in risk appetite. The bullish impulse arrived despite hawkish commentary by US Federal Reserve (Fed) officials. US Treasury bond yields dropped and undermined the Greenback, capping Gold’s plunge.
XAU/USD trades at $2,375, down 0.34%, after hitting a daily high of $2,395, just shy of surpassing $2,400. Tensions in the Middle East had subsided after Israeli officials commented that they considered striking Iran on Monday but decided to wait, according to Axios. In the meantime, the US will impose new sanctions on Iran in the upcoming days, said Jake Sullivan, the White House National Security Advisor.
Back to economic themes, Fed Chair Jerome Powell said the US economy has performed quite strongly while acknowledging that recent data shows the lack of further progress on inflation.
Gold’s daily chart depicts the yellow metal as upwardly biased despite retreating toward the $2,370 region. The formation of a Doji on Tuesday suggests that buyers lack the momentum to extend the precious metal's gains, opening the door for a pullback.
In addition, the Relative Strength Index (RSI has fallen below the 80 level and hasn’t looked back, as it is nearly crossing below the 70 level, suggesting that buying pressure is fading.
That said, XAU/USD is headed for a correction. The first support would be the $2,350 mark, followed by the April 15 daily low of $2,324. Once surpassed, Gold might test $2,300.
On the other hand, if buyers drag prices toward $2,400, a test of the all-time high of $2,431 is on the cards.
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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