Gold sinks lower with traders booking profit after steep rally last week
- Gold price slides nearly 1% lower on Monday as markets catch up on the Nonfarm Payrolls release.
- US yields spiked in early Monday trading, causing a head wind for Gold.
- Gold to look for support before reviving rally with traders to remain cautious ahead of President-elect Donald Trump taking office.
Gold’s price (XAU/USD) sees some broad profit taking and drops by 1% and halts its four-day winning streak on Monday as markets catch up and reprice the recent US Nonfarm Payrolls release. The report further confirms the narrative that the Federal Reserve (Fed) might keep its policy rate higher for longer. While higher borrowing costs are typically negative for the non-interest-bearing precious metal, investors are bracing for more volatility ahead of President-elect Donald Trump’s return to the White House on January 20.
On the economic data front, there is a relatively calm trading day ahead, with the dust settling further after the recent US Nonfarm Payrolls release. This Monday, the US Treasury will allocate some short-term bonds to the market.
Daily digest market movers: Looking for support
- Operations at Wilton Resources’ Ciemas Gold Project in Indonesia remained suspended due to the continued power outage amid heavy rainfall caused by the La Nina phenomenon, according to a Friday press release, Bloomberg reports.
- The Indonesian unit, Masmindo Dwi Area, picked Macmahon as the mining services contractor for the Awak Mas gold project in South Sulawesi, according to an exchange filing, Bloomberg reports. The contract is valued at A$463 million over seven years and is expected to start in mid-2025.
- At 16:30 GMT, three-month and six-month bills are due to be auctioned by the US Treasury.
- The US 10-year benchmark rate trades at 4.782% at the time of writing on Monday, a touch lower than the peak at opening in Asia near 4.796%.
- At 21:30 GMT, the Commodity Futures Trading Commission (CFTC) will release the Gold NC Net Positions. A forecast is not available, but the previous positioning was at $247,300. The report provides information on the size and direction of the positions taken across all maturities, participants primarily based in Chicago and New York futures markets. Forex traders focus on "non-commercial" or speculative positions to determine whether a trend remains healthy or not, as well as market sentiment towards a certain asset.
Technical Analysis: Yields went too far for Gold to follow
Gold has broken through a strong pennant formation, which was mentioned several times last week. Despite all the headwinds from higher yields and a stronger US Dollar (USD), the Bullion was able to still power through. Now support nearby needs to hold to avoid the Gold price from falling back into the pennant and resulting in a false break with the risk of more downside at hand.
XAU/USD: Daily Chart
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
Filip Lagaart
FXStreet
Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.
