Gold maintains its bid tone near record high, overbought RSI warrants caution for bulls
- Gold price rallies to a record peak on Thursday amid bets for a June Fed rate cut.
- The USD languishes near a month low and further lends support to the XAU/USD.
- A softer risk tone also benefits the safe-haven commodity, despite overbought RSI.
Gold price (XAU/USD) gains strong positive traction for the seventh straight day on Thursday and sticks to its intraday gains, near the record high during the early European session. Growing acceptance that the Federal Reserve (Fed) will start cutting interest rates in June keeps the US Dollar (USD) bulls on the defensive and turns out to be a key factor driving flows towards the non-yielding yellow metal. Apart from this, a generally softer tone, persistent geopolitical tensions and China’s economic woes lend additional support to the safe-haven commodity.
Meanwhile, Minneapolis Fed President Neel Kashkari downplayed speculations about more aggressive policy easing. This, in turn, triggers a modest bounce in the US Treasury bond yields, which helps limit the downside for the Greenback. Apart from this, extremely overstretched conditions on the daily chart might further hold back traders from placing fresh bullish bets around the Gold price. Investors now look to Powell’s second day of testimony, along with the US Weekly Initial Jobless Claims, for some impetus ahead of the NFP report on Friday.
Daily Digest Market Movers: Gold price is underpinned by Fed rate cut bets and a softer risk tone
- Bets that the Federal Reserve will start cutting interest rates in June, along with geopolitical risks and China’s economic woes, lifted the non-yielding Gold price to a record high on Wednesday.
- Fed Chair Jerome Powell told US lawmakers on Wednesday that if the economy evolves broadly as expected, the central bank can be expected to cut its benchmark interest rates later this year.
- The current market pricing indicates a greater chance, around 70% for a June Fed rate cut, which dragged the yield on the 10-year US government bond to a one-month low on Wednesday.
- Minneapolis Fed President Neel Kashkari said that he had penciled in two rate cuts in 2024 and added that he may reduce the number of cuts amid the incoming stronger macro data.
- The uncertainty about the Fed’s rate-cut path, meanwhile, keeps the US Dollar close to its lowest level since early February and should continue to act as a tailwind for the precious metal.
- Three crew members were killed in a Houthi missile strike on a cargo ship off southern Yemen, marking the first fatalities since the Iran-backed group’s attacks on vessels in the Red Sea.
- This raises the risk of a further escalation of military actions in the Middle East and supports prospects for an extension of the well-established short-term uptrend for the safe-haven commodity.
- Traders now look to the release of the US Weekly Initial Jobless Claims data and Fed Chair Jerome Powell’s second day of testimony for some impetus ahead of the US NFP report on Friday.
Technical Analysis: Gold price might consolidate its recent strong gains before the next leg up
From a technical perspective, the recent breakout through the $2,064-2,062 strong horizontal barrier and a subsequent strength beyond the $2,100 mark was seen as a key trigger for bullish traders. That said, the Relative Strength Index (RSI) on the daily chart is already flashing extremely overbought conditions. This makes it prudent to wait for some near-term consolidation or a modest pullback before positioning for an extension of the well-established short-term uptrend. Nevertheless, the Gold price seems poised to climb further towards the $2,200 psychological mark.
On the flip side, corrective declines might now be seen as a buying opportunity and remain limited near the $2,100 round figure. The said handle should act as a pivotal point, which if broken decisively could drag the Gold price back towards the $2,064-2,062 resistance-turned-support. Some follow-through selling will suggest that the XAU/USD has formed a near-term top and possibly shift the bias in favour of bearish traders.
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.