Gold (XAU/USD) regains ground on Wednesday after falling nearly 2% on the previous day. A softer US Dollar (USD) and a modest pullback in long-term US Treasury yields lend support to the precious metal. At the time of writing, XAU/USD trades around $4,366, up 0.75% on the day.
Buyers, however, lack strong conviction as a mixed fundamental backdrop keeps XAU/USD trapped within the tight range seen over the past week. Gold’s near-term direction hinges on Federal Reserve (Fed) signals and developments in the Middle East amid a sparse US economic calendar.
The minutes of the Federal Open Market Committee’s (FOMC) July meeting, due at 18:00 GMT, will be closely watched as uncertainty over the Fed’s interest-rate outlook persists.
Since the July meeting, weaker-than-expected labour market and inflation data have reduced the likelihood of an interest-rate hike at the upcoming meeting. Traders have subsequently trimmed the probability of a September hike to just 32%, according to the CME FedWatch tool, helping limit Gold’s downside.
However, the energy shock stemming from the war in the Middle East keeps inflation risks tilted to the upside, supporting expectations that the Fed may eventually need to raise interest rates.
These concerns are partially reflected in longer-term US Treasury yields, which remain elevated despite Wednesday’s modest pullback. High yields cap Gold’s upside by increasing the opportunity cost of holding the non-yielding metal.
Analysts at ING highlight that the “unresolved conflict in the Middle East is keeping energy prices bid and partially contributing to the rise in long-end yields.”
For the near term, ING sees the key catalyst in “tonight’s release of the FOMC minutes for the July meeting.” They remind clients that “the vote was 9-3 for unchanged rates and the event proved a dovish one for the short end of the US curve and the dollar, while the long end sold off,” suggesting that any reiteration of that tone could again weigh on the front end and the Dollar even as long-end yields remain sensitive to higher energy prices and geopolitical risk.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.37, down 0.30% on the day.
Technical analysis: XAU/USD struggles below the 100-day SMA
The metal holds above the 20-day Bollinger simple moving average (SMA) at $4,219, but the near-term tone appears capped, with price sitting just below the 100-day SMA at $4,381.
The upper Bollinger band at $4,519 marks the top of the current volatility envelope, while a mildly elevated Relative Strength Index (RSI) on the daily chart at 59 and a still-positive Moving Average Convergence Divergence (MACD) histogram hint at limited bullish momentum rather than a clear trend extension.
On the downside, a break below the recent range support at $4,300 could expose the middle Bollinger Band near $4,219. The $4,000 psychological mark offers the next support, followed by the lower Bollinger Band at $3,920.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Gold FAQs
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.
