- Gold rises as traders “buy the fact” of the ceasefire deal brokered between Israel and Hezbollah on Tuesday.
- Technical support from a major trendline is also adding upside pressure as it represents a key chart level for Gold.
- Wednesday sees an economic data dump from the US; changes in interest rate expectations could impact Gold price.
Gold (XAU/USD) recovers into the $2,650s on Wednesday as traders “buy the fact” of the ceasefire deal brokered between Israel and Hezbollah after “the rumor” led to heavy selling on Monday. The two warring parties agreed on a 60-day ceasefire deal which has, so far, held, although sceptics say it will remain unsustainable without an end to hostilities in Gaza, according to Bloomberg News.
Gold may also be rising from safe-haven flows due to other geopolitical hotspots. Reports from Ukraine suggest the frontline is becoming “as unstable as at the start of the war,” according to the UK’s Secretary of State for Defence, John Healy.
A weaker US Dollar (USD) on Wednesday, meanwhile, may be providing Gold with a backwind, given the two assets’ negative correlation to each other.
In a busy day for markets, the precious metal could face volatility with the release of key US metrics covering growth, inflation, and the labor market, particularly if they revise the outlook for US interest rates, a key driver for Gold price.
Gold rises as market bets increase of Fed cutting
Gold might be further supported by the steady rise in the probability of the Federal Reserve (Fed) cutting interest rates at its December policy meeting, according to the CME FedWatch tool, which calculates probabilities based on the fluctuating price of 30-day Fed Fund interest rate futures.
From determining about a 56% probability of the Fed cutting interest rates by 25 basis points (bps) (0.25%) at its meeting in December, at the start of the week, the CME tool now calculates the chances as 66.5%. The probability of the Fed not cutting interest rates at all has fallen from 44% to 33.5% over the same period.
The increased chances of the Fed cutting interest rates is positive for Gold price as it lowers the opportunity cost of holding the non-interest-bearing asset, making it more attractive to investors.
Technical Analysis: XAU/USD bounces off major trendline
Gold has bounced off a major trendline that reflects the precious metal’s long-term uptrend on Wednesday.
XAU/USD Daily Chart
The precious metal trend is in a medium and long-term uptrend, and given the maxim that “the trend is your friend,” the odds still favor a continuation higher. In the short term, the trend is unclear.
A break above $2,721 (Monday’s high) would be a bullish sign and give the green light to a continuation higher. The next target would be at $2,790, matching the previous record high.
Alternatively, a decisive break below the major trendline would likely lead to further losses and confirm the short-term trend as bearish.
A decisive break would be one accompanied by a long red candlestick that broke cleanly through the trendline and closed near its low – or three red candlesticks in a row that broke below the line.
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.
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