$4,000 gives way: gold retreats despite risk-off sentiment as hawkish Fed expectations weigh

July low for Gold as hawkish Fed expectations sustain selling pressure.

Gold (XAU/USD) hit $3,965, its lowest since July. The decline came during Friday’s Asian session as expectations of further Federal Reserve (Fed) interest rate increases outweighed the risk-off mood across markets. With rate expectations driving prices, the metal remains under pressure and is heading for a monthly loss. At the time of writing, XAU/USD is near $3,979, a decline of nearly 1% on the day.

Disappointing technology earnings have revived doubts about heavy AI expenditure and whether it will deliver adequate returns, prompting traders to reduce risk. Demand for government bonds is pulling US Treasury yields lower, with the US Dollar also losing ground.

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A third consecutive day of losses leaves the US Dollar Index (DXY) near 101.65. The index measures the Greenback against a basket of six major currencies.

Positioning could matter more than fundamentals for the Dollar in the near term, according to analysts at ING. They warn that “the main risk for the dollar today is some precautionary unwinding of net-long positions ahead of Tuesday’s US midterm elections.” The analysts add that “a Democratic sweep is trading around 68% in prediction markets,” describing that outcome as “slightly negative for the US dollar from a few angles, from higher risk of government shutdown and gridlock on debt ceiling negotiations to potential damage to already shaky AI-related sentiment.”

ING consequently warns that “resurgent AI-related jitters and the upcoming US midterms are increasing downside risks for the dollar,” while acknowledging that “a still-hawkish Fed argues against major corrections.”

Reports of a major security breach at cryptocurrency exchange Binance are putting digital assets under pressure and adding to investor unease. Yet the defensive mood has not supported Gold so far. Traders remain focused on rising Oil prices linked to Middle East tensions and the implications for inflation and interest rates.

Concerns that the US may restart military strikes against Iran after next week’s US midterm elections have lifted Oil prices to their highest since May. With West Texas Intermediate (WTI) above $103 a barrel, energy-related inflation risks remain in focus.

The Fed faces a risk that higher energy costs will prolong inflation above its 2% target. Thursday’s data showed September headline Personal Consumption Expenditures (PCE) inflation increasing 0.5% MoM and 3.6% YoY. The core measure rose 0.3% MoM and 3.1% YoY.

Following the Fed’s decision to hold rates steady in October, traders now assign around a 75% probability to a December increase, according to the CME FedWatch Tool. Gold pays no interest, making higher borrowing costs a typical source of pressure on the metal.

Below $4000: XAU/USD faces further downside in technical analysis

Lower highs and lower lows have defined the daily XAU/USD chart since the late-August peak near $4,700. Sellers retain control as the metal sits beneath its 50-day, 100-day and 200-day Simple Moving Averages (SMAs). Buying interest remains weak, with the Relative Strength Index (RSI) near 34. Meanwhile, a negative Moving Average Convergence Divergence (MACD) reading points to continued downside pressure.

The first resistance level is $4,000, ahead of $4,100. Beyond those levels sit the 100-day SMA near $4,218 and the nearby 50-day SMA at $4,257. A more substantial rebound could put horizontal resistance at $4,400 in view, with the 200-day SMA around $4,491 next.

Below the already-breached $4,000 level, Gold’s nearest support is $3,950, ahead of the July low near $3,941. A clear break beneath this zone would leave scope for additional declines.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Gold: frequently asked questions

Gold investment: the main reasons

Widely used both to store value and facilitate exchange, Gold has held an important place throughout human history. Beyond its lustre and use in jewellery, the precious metal is now commonly regarded as a safe-haven asset: an investment considered attractive during periods of turmoil. Its independence from any particular issuer or government also underpins its widespread role as a hedge against inflation and currency depreciation.

Gold’s largest buyers

The largest holders of Gold are central banks. To support their currencies during turbulent periods, they typically diversify reserves and purchase Gold, reinforcing perceptions of economic and currency strength. Substantial Gold reserves can bolster confidence in a country’s solvency. According to the World Gold Council, central banks increased their reserves by 1,136 tonnes in 2022, worth around $70 billion. No larger annual purchase has been recorded. Emerging-economy central banks, including those in China, India and Turkey, are expanding their Gold reserves rapidly.

Gold’s correlations with other assets

Both the US Dollar and US Treasuries are major reserve and safe-haven assets, and Gold is inversely correlated with them. Dollar weakness typically supports Gold, allowing investors and central banks to diversify their holdings during turbulent periods. The metal also tends to move in the opposite direction to risk assets. Stock market gains generally weigh on Gold prices, whereas selling in riskier markets tends to support the precious metal.

Key drivers of Gold prices

Numerous factors influence Gold prices. Its safe-haven appeal means geopolitical instability or concerns about a severe recession can trigger rapid gains. Because Gold generates no yield, lower interest rates tend to support it, while higher borrowing costs generally put it under pressure. Even so, the US Dollar (USD) drives most price movements, as Gold is denominated in dollars (XAU/USD). A stronger Dollar usually restrains Gold prices; a weaker Dollar is more likely to lift them.