Gold appears as a ‘sell-on-bounce’ trade amid widening Middle East conflict
- Gold bounces from a one-week low near $4,350 in Asia on Wednesday, but remains below $4,400.
- US Dollar bears the brunt of renewed Japanese Yen demand, but Iran risks could lend support.
- Gold defends 50-day SMA for now after facing rejection just below 21-day SMA.
Gold is replicating the recovery move seen in Tuesday’s Asian trading, bouncing off one-week lows near $4,350 early Wednesday. However, buyers remain cautious amid widening Middle East conflict.
Gold: Will the rebound last?
Gold is attempting a tepid rebound, halting a three-day decline so far this Wednesday, as the US Dollar (USD) struggles near two-week lows amid resurgent demand for the Japanese Yen (JPY).
Continued bets surrounding the Bank of Japan’s (BoJ) aggressive tightening cycle remain a tailwind for the local currency, while weighing on the USD/JPY pair and the Greenback.
However, the downside in the USD could be limited by the widening conflict in the Middle East, which keeps Oil prices elevated and inflation concerns alive. This, in turn, bolsters expectations for more than one Federal Reserve (Fed) interest rate hike this year.
Iranian-backed Houthis in Yemen launched strikes on several Saudi cities.
Meanwhile, the US Central Command said it destroyed five Iranian crude oil carriers on Tuesday, which it called a response to Iran's Islamic Revolutionary Guard Corps (IRGC) targeting a US Navy warship with ballistic missiles twice over the previous two days
A separate IRGC statement said it attacked two US destroyers, state media reported.
Looking ahead, Gold remains exposed to two-way risks as the US Consumer Price Index (CPI) data looms, with a sell-the-bounce trading strategy likely, particularly after China’s inflation came in hotter-than-expected.
China's CPI rose 0.8% year-over-year (YoY) in August, accelerating from 0.5% in July. The Producer Price Index increased 3.8%, exceeding the forecast for a 3.6% gain and outpacing July’s 3.5%.
US CPI outlook sees core contained for now but risks skewed to the upside
According to TD Securities, this week’s CPI release should show that “underlying inflation stayed under control in August,” with the core index expected “to rise 0.19% m/m.” Strategists there anticipate that “the services segment should be the main driver of inflation, while core goods prices likely acted as a drag, posting a modest m/m drop.” On an annual basis, they “project that core CPI rose 2.3% on a y/y basis, down 10 bps vs July, while headline inflation likely stayed unchanged at 3.4% y/y.” However, they caution that “risks to our forecasts” are “skewed to the upside given that we're assuming a number of large price declines in tariff-exposed goods categories.”
Looking beyond the August print, TD Securities expects “core inflation to see some relief in Q3,” noting that “we expect the core segment to continue to evolve positively through October after cresting in May at 2.9% y/y.” They say the same pattern likely applies to headline CPI, which “likely saw its peak for the year at 4.2% in May,” though they stress that “its evolution will remain entirely dependent on the final resolution of the Middle East conflict.” Overall, TD Securities anticipates that “both series” will “resume y/ y momentum in Q4.”
Gold price technical analysis: Daily chart
In the daily chart, XAU/USD trades at $4,379.08, holding in a neutral but slightly constructive stance as it sits above the 50-day and 100-day simple moving averages (SMAs) at roughly $4,261 and $4,343 respectively, while remaining capped beneath the 21-day SMA near $4,462 and the longer-term 200-day SMA around $4,537. The Relative Strength Index (RSI) at 49 suggests directionless momentum for now, hinting at consolidation rather than a clear trend extension until price resolves away from this mid-range band of moving averages.
On the topside, initial resistance is defined by the 21-day SMA at about $4,462, with a break there exposing the more formidable barrier at the 200-day SMA near $4,537, where longer-term sellers could re-emerge. On the downside, immediate support is implied by the latest close around $4,379, followed by the 100-day SMA at roughly $4,343 and then the 50-day SMA near $4,261, and a decisive drop below this cluster would weaken the constructive tone and open the door to a deeper corrective phase.
(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.
Author
Dhwani Mehta
FXStreet
Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.
