Gold retakes $4,000 as Oil softens: Can the recovery withstand the Fed decision?

Gold rises 0.6% to $4,020, recovering from $3,978.
Declining Oil prices and Treasury yields ease pressure on Bullion.
Ahead of Warsh's remarks, the probability of a December Fed hike hits 83%.

Gold has regained ground with a 0.6% rise, after closing last week below $4,000. Ahead of this week’s Federal Reserve (Fed) monetary policy meeting, expectations of a possible de-escalation in the US-Iran conflict have weighed on energy prices. Having recovered from a daily low of $3,978, XAU/USD is trading at $4,020.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Can Lower Treasury Yields and Middle East Diplomacy Sustain the XAU/USD Recovery?

Price movements remain driven by geopolitics, with Oil in particular showing a modest positive correlation with the US Dollar. The Mecca Pact members, Iran, Turkey, Pakistan and Saudi Arabia, have agreed to keep discussions going. At the same time, speculation persists about a coordinated US-Israel attack on Tehran, as Iranian officials have ruled out nuclear discussions at the Mecca Pact meeting.

Bullion has found room to recover as US Treasury yields ease and West Texas Intermediate (WTI), the US Oil benchmark, slips 0.5% to $102.90.

With investors removing expectations of a Fed rate increase this Wednesday, the US 10-year T-note yield has declined 2 basis points to 4.978%. This yield has an inverse relationship with Gold prices.

Money markets were assigning an 83% probability to a Fed rate increase at the December meeting at the time of writing. Attention nevertheless remains on Fed Chair Kevin Warsh's press conference. Although he does not offer guidance, his remarks could indicate the central bank’s next policy move.

For traders, the distinction is important: Gold offers a hedge against inflation but generally struggles when interest rates are high. A hawkish message from Warsh could put further pressure on XAU/USD, leaving a move below $4,000 possible.

Fresh indications of the interest-rate outlook may come from the forthcoming US Personal Consumption Expenditures (PCE) data, the Fed's preferred inflation measure, which traders are monitoring. Investors are also preparing for the US midterm elections on 3 November.

XAU/USD Technical Analysis: Can Gold Reach $4,050 as Buyers Step In Below $4,000?

Gold is reversing course after falling to a two-month low of $3,975, with a ‘bullish engulfing’ candlestick pattern close to forming and pointing to further gains. The Relative Strength Index (RSI) is moving higher, lending momentum to the recovery. However, the 14-day RSI is still in bearish territory and could limit the advance.

For XAU/USD, an initial hurdle stands at $4,100. Moving above it would bring the psychological $4,150 level into focus, followed by $4,200. Beyond that, the next levels are the 100-day Simple Moving Average (SMA) at $4,221 and the 50-day SMA at $4,294.

If the bearish trend resumes, XAU/USD would first encounter support at $4,000 and then at October’s 23-day low of $3,975. Further key support lies at $3,959, the July 17 low, followed by the year-to-date (YTD) low of $3,941.

Gold: Key Questions Answered

What Makes Gold an Investment Choice?

Throughout human history, Gold has served extensively as both a store of value and a means of exchange. Beyond its lustre and use in jewellery, the precious metal is now widely regarded as a safe-haven asset, or an investment considered suitable during periods of turmoil. Its independence from any particular issuer or government also underpins its widespread appeal as a hedge against inflation and currency depreciation.

Which Buyers Hold the Most Gold?

The largest holdings of Gold belong to central banks. To bolster their currencies during unsettled periods, they typically diversify reserves and purchase Gold, reinforcing perceptions of economic and currency strength. Substantial Gold reserves can also inspire confidence in a country’s solvency. According to World Gold Council data, central banks expanded their reserves by 1,136 tonnes of Gold, valued at around $70 billion, in 2022. No higher annual purchase has been recorded since records began. Emerging-economy central banks, including those in China, India and Turkey, are rapidly building their Gold holdings.

How Does Gold Move Relative to Other Assets?

Both the US Dollar and US Treasuries, major reserve and safe-haven assets, tend to move inversely to Gold. Dollar weakness generally supports Gold, allowing investors and central banks to diversify their holdings during turbulent periods. A similar inverse relationship exists between Gold and risk assets: stock-market advances tend to pressure the metal, whereas selling in riskier markets generally supports it.

Which Factors Drive Gold Prices?

Several influences can shift Gold prices. Its safe-haven appeal means geopolitical turmoil or concerns about a severe recession can send prices sharply higher. Since Gold pays no yield, lower interest rates usually support it, while a higher cost of borrowing generally puts it under pressure. Even so, movements in the US Dollar (USD) account for much of the price action, as Gold is denominated in dollars (XAU/USD). Dollar strength tends to restrain Gold prices, while a weaker Dollar is likely to lift them.