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The price of gold (XAU/USD) experienced a recovery from previous session losses, although trading volume remained lower than usual on Monday, likely due to the New Year's holiday. This upward movement is attributed to a confluence of factors, primarily increased risk aversion in the market. The incoming Trump administration and its potential economic policies are fueling uncertainty, driving investors towards the safe-haven asset that is gold. Anticipation of the Trump administration's policies, particularly concerning potential tariffs and trade, is contributing to a risk-off sentiment, further bolstering gold's appeal. However, a countervailing force is the expectation of fewer Federal Reserve (Fed) rate cuts in 2025. This less dovish stance from the Fed could potentially limit the extent of gold's price increase, as fewer rate cuts imply a stronger dollar and less attractive conditions for non-yielding assets like gold.
Adding to the uncertainty and bolstering gold's safe-haven status is the heightened geopolitical risk environment. The ongoing Russia-Ukraine conflict continues to contribute to instability, while recent events in the Middle East have significantly increased tensions. The Israeli attacks on hospitals in Gaza, resulting in casualties, have exacerbated these concerns and driven investors further toward gold as a safe haven. The impact of these geopolitical factors on market sentiment is undeniable, influencing investors’ decisions and contributing to gold's price appreciation. This is amplified by the fact that gold prices are set to end the year with a substantial 27% gain, their strongest annual performance since 2010. This impressive rally is a result of a combination of factors, including significant central bank purchases, the rising geopolitical tensions discussed above, and the monetary easing policies adopted by numerous major central banks.
The performance of the US Dollar Index (DXY) and Treasury yields plays a crucial role in gold's price movements. The DXY, which measures the USD against its major peers, is trading slightly below its peak since November 2022, remaining subdued. This relative weakness of the dollar provides indirect support for gold, as it becomes relatively cheaper for holders of other currencies. The digestion of the Fed’s hawkish pivot continues to influence market dynamics. While the Fed did cut its benchmark interest rate by a quarter point in December, the accompanying 'Dot Plots' suggested only two rate cuts for next year. This signals a more cautious approach to future rate reductions compared to prior expectations, impacting investor sentiment and contributing to gold's price action. The depreciation of US Treasury bond yields is also offering support to gold, which is a non-interest-bearing asset. The 2-year and 10-year yields currently stand at 4.32% and 4.62% respectively. Lower yields make gold comparatively more attractive to investors seeking alternatives to interest-bearing investments.
Adding to the complex interplay of factors impacting gold prices is the ongoing geopolitical instability highlighted by recent events in Russia. Russia’s Federal Security Service's announcement of foiled assassination plots against high-ranking Russian officers and their families, allegedly planned by Ukrainian intelligence, underscores the continuing volatility in the region. This further reinforces the perception of risk, thereby supporting demand for gold as a safe haven asset. The confluence of these events, ranging from economic policy uncertainties to overt acts of geopolitical aggression, contributes to a persistent environment of risk aversion, supporting the recent upward trend in gold prices. The Federal Reserve's signaled shift toward a more cautious approach to future rate cuts reflects the uncertainties surrounding the economic impact of the incoming Trump administration's policies. This cautious outlook from the Fed, coupled with escalating geopolitical tensions, creates a complicated backdrop for the gold market.
Technically, gold prices are currently consolidating near the nine- and 14-day Exponential Moving Averages (EMAs) around $2,620.00. The daily chart shows a sideways movement, indicative of a consolidation phase. The Relative Strength Index (RSI) hovers slightly below 50, suggesting a neutral sentiment. A decisive break above 50 could indicate increased buying pressure. Potential resistance levels lie at the psychological level of $2,700.00 and the monthly high of $2,726.34 (recorded on December 12th). On the downside, support is found around the nine- and 14-day EMAs, with a break below potentially pushing prices toward the monthly low of $2,583.39. This technical analysis provides a framework for understanding the short-term price movements and potential future trajectories for gold, highlighting the importance of monitoring key technical indicators alongside the broader economic and geopolitical landscape. The interplay of these macro-economic factors and the technical indicators is crucial in forecasting potential price movements in the gold market in the coming periods.
Source: Gold price recovers recent losses, upside seems limited due to rising hawkish Fed outlook