- The price of gold is falling as the Fed's retreating rate cuts curb demand.
- Strong US retail sales are fueling uncertainty about the timing of Fed rate cuts.
- Worsening tensions in the Middle East continue to support the price of gold.
The price of gold (XAU/USD) is falling after facing selling pressure near the crucial resistance of $2,400 in the early US session on Tuesday. Precious metal comes under pressure as US dollar and Treasury yields extend rally after strong March US Retail sales data added to doubts about when the Federal Reserve (Fed) will make its initial rate cut.
Yields on 10-year US Treasuries rose to 4.63%, renewing a five-month high. Financial markets expect the Fed to start cutting its key borrowing rates from September. Traders are also only seeing two cuts instead of three as most had assumed Fed policymakers in the latest scatter plot. The U.S. dollar index (DXY), which tracks the value of the U.S. dollar against six major currencies, is up at 106.30.
Higher bond yields weigh on gold because they raise the opportunity cost of investing in it. However, gold has performed very well over the past few weeks despite rising bond yields amid geopolitical tensions in the Middle East region. Demand for gold from investors and central banks as a safe-haven asset is growing at a time of global economic uncertainty and worsening geopolitical tensions.
Daily market roundup: Gold price falls after robust US retail sales data
- The price of gold fell to $2,370 as it attempts to regain new all-time highs around $2,430. The sheer strength of the US dollar and US bond yields act as a barricade for gold. The appeal of the US dollar strengthened and bond yields continued to rise as robust retail sales data for March deepened uncertainty about when the Federal Reserve will start cutting its key interest rates.
- US retail sales data for March released on Monday suggested strong demand even as US interest rates remain higher. Monthly retail sales rose a sharp 0.7%, beating expectations for a 0.3% increase. Retail sales were revised higher to 0.9% from 0.6% in February. Retail sales data is one of the leading indicators of consumer spending, which accounts for more than two-thirds of the US economy. Higher retail sales indicate that household demand remains strong, a factor supporting inflation.
- Strong retail sales data combined with robust job demand and higher-than-expected consumer price index (CPI) data forced traders to dispel expectations of an early Fed rate cut. CME's FedWatch tool shows markets are pricing in interest rates to remain unchanged at the June and July meetings in a range of 5.25% to 5.50%. The Fed is now expected to cut rates in September.
- Meanwhile, concerns about Middle East tensions spilling over beyond Gaza are keeping safe-haven demand strong. Investors fear further escalation of Israeli-Iranian tensions after Israel's army chief of staff, Herzi Halev, said it would respond to an Iranian attack on its territory that launched hundreds of drones and missiles, Al Jazeera reports. US President Joe Biden has stated that he will not support a counterattack from Israel.
Technical Analysis: Gold price failed to retrace $2,400
The price of gold is falling after failing to recapture new lifetime highs near $2,430. Upside in the precious metal remains limited as momentum oscillators cool after becoming extremely overbought. Relative Strength Index (RSI) for 14 periods daily diagram falling slightly after peaking around 85.00. The broader demand period is intact as the RSI remains in the bullish range of 60.00-80.00.
On the other hand, the April 5 low near $2,268 and the March 21 high of $2,223 will be the main support areas for The price of gold.
Frequently Asked Questions About Gold
Gold has played a key role in human history as it has been widely used as a store of value and a medium of exchange. Nowadays, the precious metal, apart from its luster and use for jewelry, is widely seen as a safe haven, meaning it is considered a good investment in turbulent times. Gold is also widely seen as a hedge against inflation and currency depreciation because it does not rely on any particular 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 buy gold to improve the perceived strength of the economy and currency. High gold reserves can be a source of confidence for a country's solvency. Central banks added 1,136 tons of gold to their reserves in 2022, worth about $70 billion, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks from emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the US dollar and US Treasuries, which are major reserves and safe-haven assets. When the dollar weakens, gold tends to rise, allowing investors and central banks to diversify their assets during turbulent times. Gold is also inversely correlated with risk assets. Stock market rallies tend to weaken the price of gold, while sell-offs in riskier markets tend to favor the precious metal.
The price can fluctuate due to a wide variety of factors. Geopolitical instability or fears of a deep recession can quickly escalate the price of gold due to its safe-haven status. As a lower-yielding asset, gold tends to rise with lower interest rates, while the higher cost of money typically weighs on the yellow metal. Still, most moves depend on how the US dollar (USD) behaves when the asset is priced in dollars (XAU/USD). A strong dollar tends to keep the price of gold in check, while a weaker dollar is likely to push gold prices up.
