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Gold price retreats from record peak amid some profit-taking, Fed rate cut bets favour bulls

  • Gold price gains strong positive traction for the second straight day and refreshes record high.
  • The Fed’s projected three rate cuts this year weigh on the USD and benefit the yellow metal.
  • The prevalent risk-on mood prompts some profit-taking amid slightly overbought conditions.

Gold price (XAU/USD) retreats after hitting a fresh record high earlier this Thursday and trades just above the $2,200 round-figure mark during the first half of the European session, still up for the second straight day. The prevalent risk-on environment – as depicted by a generally positive tone around the equity markets – prompts some profit-taking around the safe-haven precious metal. Apart from this, a modest uptick in the US Treasury bond yields turns out to be another factor undermining the commodity amid slightly overbought conditions on short-term charts.

The downside for the Gold price, however, seems limited in the wake of the Federal Reserve's (Fed) projection for three 25 basis points (bps) interest rate cuts this year. This should keep a lid on any meaningful upside for the US bond yields and might continue to weigh on the US Dollar (USD), which, in turn, should benefit the non-yielding yellow metal. Hence, any further slide might still be seen as a buying opportunity and remain limited. Traders now look to the flash PMIs and the US macro data – Initial Jobless Claims and Existing Home Sales – for short-term opportunities. 

Daily Digest Market Movers: Gold price eases from record high amid risk-on, Fed rate cut bets to act as a tailwind

  • The Federal Reserve on Wednesday maintained its projection of three rate cuts for this year, which weighs on the US Dollar for the second straight day and lifts the Gold price to a fresh all-time peak.
  • Policymakers now see the US economy to grow at 2.1% this year compared to 1.4% expected previously, and the jobless rate is seen at 4% by the end of this year, versus 4.1% anticipated in December.
  • The Personal Consumption Expenditures Price Index, excluding food and energy, is projected to rise at a 2.6% rate by year-end, compared to the 2.4% increase in the previous quarterly economic projections.
  • In the post-meeting press conference, Fed Chair Jerome Powell said that inflation is moving down gradually on a somewhat bumpy road; the recent high inflation readings kept officials on a cautious footing.
  • According to the CME Group's FedWatch Tool, traders are now pricing in a greater chance, around 75%, that the Fed will begin cutting interest rates at the June policy meeting, up from 59% on Tuesday.
  • This leads to a modest decline in the US Treasury bond yields, dragging the US Dollar to a one-week low during the Asian session on Thursday and lending some support to the precious metal.
  • A slightly overbought condition on the daily chart prompts some profit-taking at higher levels amid a positive tone around the equity markets, which tends to undermine the safe-haven XAU/USD.

Technical Analysis: Gold price might consolidate amid overbought RSI, bullish potential seems intact

From a technical perspective, the overnight strong positive move confirmed a breakout through a bullish flag chart pattern and validated the positive outlook for the Gold price. That said, the Relative Strength Index (RSI) has moved back above the 70 mark, making it prudent to wait for some near-term consolidation or a modest pullback before traders start positioning for any further appreciating move. Nevertheless, the broader setup supports prospects for an extension of the recent well-established strong uptrend witnessed over the past month or so.

Meanwhile, any meaningful corrective decline below the $2,200-2,190 region is likely to attract fresh buyers and remain limited near the $2,160-2,158 horizontal zone. This is followed by the weekly swing low, around the $2,146 area, which, if broken decisively, might prompt some technical selling and drag the Gold price further towards the next relevant support near the $2,128-2,127 zone. The XAU/USD could decline further, eventually dropping to the $2,100 round figure.

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

Haresh Menghani

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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The US Dollar fell. Gold didn't rally. That tells you everything
Gold (XAU/USD) is struggling to capitalize on a weaker US Dollar (USD), after repeatedly failing to establish itself above the $4,200 level. The precious metal remains confined to a relatively narrow trading range despite a combination of developments that would normally support higher prices.