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16 Jan 2025
Gold extends recovery on rate cut expectations
- Gold price extends recovery and rises above $2,700, looking for more upside.
- The mixed US CPI release on Wednesday fueled hopes for a Fed rate cut before the summer.
- Gold sprints higher and sets sail for the first important pivotal level at $2,708.
Gold’s price (XAU/USD) edges higher for the third day in a row and recovers initial weekly losses, rising above the $2,700 level at the time of writing on Thursday. The recovery comes in the run-up and release of the December US Consumer Price Index (CPI) data on Wednesday.
While headline CPI accelerated compared to the previous month, core inflation rose at a slower pace than in November, which increased the probability of a 25 basis point (bps) rate cut by the Federal Reserve (Fed) in June. According to the CME FedWatch tool, the odds of interest rates being lower than current levels after the June meeting stand at 63.8%, compared to 57.3% before the inflation data and 51.4% on Monday.
On the economic data front, the US Initial Jobless Claims for the week ending January 10 and US Import/Export and Retail Sales data for December are due on Thursday. Meanwhile, US Treasury yields are falling further, with the US 10-year benchmark trading below 4.70%.
Daily digest market movers: Where is the Fed when you need them?
- Despite several Federal Reserve speakers on Wednesday, officials did not communicate many market-moving comments about whether market expectations were wrong-footed or in line with the Fed’s policy.
- At 13:30 GMT, Retail Sales for December will be released with expectations for a 0.6% month-on-month increase compared to 0.7% in the previous month. As always, the revisions might be more impactful than the actual number.
- South African rescue workers retrieved 78 bodies from a disused gold mine where hundreds of illegal extractors have been involved in a months-long standoff with the authorities, Bloomberg reports.
- The US 10-year yield is trading around 4.667%, over 2.5% lower than its peak performance this week on Tuesday at 4.807%.
Technical Analysis: Here comes the hard part
Gold bulls face their first litmus test on the upside on Thursday, with some heavy resistance coming in around the pivotal level of $2,708, followed by $2,721. The Relative Strength Index (RSI) is steepening quite quickly in the daily chart. Risk of any overheating in the RSI momentum indicator by the time Bullion hits that $2,720 area could see a quick correction back to $2,680.
The first support is the descending trendline in the pennant chart formation, which has been discussed several times in the past few days. That level is currently around $2,671. In case more downside occurs, the 55-day Simple Moving Average (SMA) at $2,648 is the next support, followed by the 100-day SMA at $2,640.
On the upside, the October 23 low at $2,708 is the key pivotal level to watch. Once that level is cleared, $2,721, which is a sort of a double top in November and December last year, is rapidly approaching. In case Bullion powers through that level, the all-time high of $2,790 is the key upside barrier.
XAU/USD: Daily Chart
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.