- Gold is edging lower within its range as markets revise down their outlook for China, the world’s largest consumer of Gold.
- The precious metal is supported by ETF flows and haven demand amid raised geopolitical tensions.
- Technically, XAU/USD breaks through a trendline as it extends its narrow range-bound market mode.
Gold (XAU/USD) exchanges hands in the $2,630s on Tuesday as the yellow metal edges lower within the familiar $50 range of recent weeks.
Disappointment at the limited extent of fiscal stimulus announced by China on Tuesday is a headwind for Gold, since China is the world’s largest consumer of the precious metal. Reduced chances that the Federal Reserve (Fed) will cut interest rates by another double-dose 50 basis points (bps) (0.50%) at its next meeting in November further weighs. The increasing probability that the Fed will only cut by 25 bps(0.25%), or even that it may not cut at all, is a headwind for Gold because it suggests the opportunity cost of holding the non-interest-paying asset will remain higher than previously expected.
Gold underpinned by ETF flows, haven demand
Gold is supported by data revealing high demand for Gold-backed Exchange Traded Funds (ETF). These enable investors to buy shares in Gold rather than purchasing bullion itself. Net ETF inflows have risen significantly during the summer, and this is often taken as a strong indicator of future demand trends.
In August, “Global physically-backed Gold ETFs added $2.1bn,” said the World Gold Council (WGC), thereby “extending their inflow streak to four months.”
This follows July, when Gold ETFs attracted $3.7 billion, the highest inflows since April 2022.
Gold also continues to provide an attractive safe-haven amid rising geopolitical tensions. On Tuesday, Israel stepped up its attacks on targets in Lebanon after a Hamas bombing in southern Israel. Israeli forces further claimed to have killed a leading Hezbollah member in charge of budgeting and logistics.
In response to the relentless onslaught, which has claimed many of the group’s most senior figures, deputy leader of the group Naim Qassem said the conflict between Hezbollah and Israel “was a war about who cries first, and that Hezbollah would not cry first,” according to Reuters. He further added that Hezbollah’s capabilities were still intact.
Markets are also on tenterhooks anticipating a retaliatory attack by Israel on Iran for its ballistic rocket raid last week.
The overall trend lower in global interest rates – notwithstanding the recalibration of their trajectory in the US – puts a further floor under Gold price as it increases Gold’s attractiveness as a portfolio asset.
Technical Analysis: Gold tests trendline
Gold tests an important trendline as it continues unfolding within a narrow sideways range. The range has a ceiling at around $2,673 (October 1 high) and a floor at $2,632 (October 4 low).
XAU/USD Daily Chart
The short-term trend is sideways, and given the technical analysis principle that “the trend is your friend,” it is more likely than not to endure with price oscillating between the aforementioned poles.
A break above $2,673 would increase the odds of a resumption of the old uptrend, probably leading to a continuation up to the round-number target at $2,700.
A break below $2.632 would lead to a move down to at least the swing low of $2,625 (September 30 low). A break below that level would likely see prices give way to support at $2,600 (August 18 high, round number).
On a medium and long-term basis, Gold remains in an uptrend, with the odds favoring an eventual resumption higher once the current period of consolidation has ended.
It would require a breakout either above the top of the range or below the bottom to confirm a new directional bias.
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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