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Breaking: Gold plunges below $3,900 as YTD low comes into focus
- Below $3,900, Gold slides to a four-month low.
- Robust US growth and high Core PCE inflation weigh on bullion.
- Following Wednesday’s decision, the probability of a December Fed rate rise drops from 84% to 70%.
Below $3,900 on Friday, Gold set a fresh year-to-date (YTD) low despite investors scaling back expectations of policy tightening by the Federal Reserve. At the time of writing, XAU/USD is down almost 3%.
Strong economic growth, resilient labour market figures and a very hot Core PCE reading have characterised this week’s US data, lending support to the US Dollar. Together, these releases are weighing on bullion despite a decline in US Treasury yields.
As a Dollar-denominated asset, Gold is under pressure from the US currency’s advance. The Dollar’s appeal has also increased as an escalation of the Middle East conflict drives Oil prices higher.
Investors nevertheless remain sceptical about a December interest rate rise following Wednesday’s Federal Reserve decision and the absence of forward guidance from Chair Kevin Warsh.
According to Prime Terminal pricing, the probability stands at 70%, compared with 84% after the Fed meeting.
Gold on the 5-minute chart
Gold explained
Widely used both to preserve wealth and to facilitate exchange, Gold has occupied an important place throughout human history. Beyond its lustre and use in jewellery, the precious metal is now widely 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 reputation as a hedge against inflation and currency depreciation.
The largest holders of Gold are central banks. To support their currencies during unsettled periods, they typically diversify reserves and purchase Gold, strengthening perceptions of their economies and currencies. 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 of Gold in 2022, worth around $70 billion. No larger annual purchase has been recorded. Emerging economies, including China, India and Turkey, are rapidly expanding their central bank Gold reserves.
Both the US Dollar and US Treasuries are major reserve and safe-haven assets, and Gold is inversely correlated with them. A weakening Dollar generally coincides with rising Gold prices, allowing central banks and investors to diversify their holdings during turbulent periods. Risk assets also have an inverse relationship with Gold: stock market gains tend to put pressure on its price, whereas selling in riskier markets generally supports the precious metal.
Numerous factors can influence Gold prices. Its safe-haven appeal means geopolitical instability or concerns about a severe recession can rapidly lift its price. Because Gold pays no yield, lower interest rates tend to support it, while a higher cost of borrowing usually weighs on the metal. Nevertheless, the behaviour of the US Dollar (USD) drives most price movements, since Gold is quoted in dollars (XAU/USD). Dollar strength generally restrains Gold prices; a weaker Dollar, by contrast, is likely to lift them.
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