$4,000 reclaimed: Gold recovery faces Fed decision test as Oil eases

Gold advances 0.6% to $4,020, recovering from $3,978.
Falling oil prices and Treasury yields ease pressure on Bullion.
83% odds of a December Fed hike as markets await Warsh's remarks.

$4,020 is the current XAU/USD price. Gold has rebounded from a daily low of $3,978 and is up 0.6%, having ended last week below $4,000. Ahead of this week’s Federal Reserve (Fed) monetary policy meeting, speculation that the US-Iran conflict could de-escalate has driven energy prices lower.

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

XAU/USD recovery supported by lower Treasury yields and Middle East diplomacy

Oil prices remained particularly sensitive to geopolitical developments and have displayed a modest positive correlation with the US Dollar. The Mecca Pact members, Iran, Turkey, Pakistan and Saudi Arabia, agreed to keep talks going. However, with Iranian officials excluding nuclear negotiations from the Mecca Pact meeting, speculation persists about a coordinated US-Israel attack on Tehran.

A 0.5% decline has taken West Texas Intermediate (WTI), the US oil benchmark, to $102.90. Alongside lower US Treasury yields, the drop has created room for bullion to recover.

As investors reduce bets on a Fed rate increase this Wednesday, the US 10-year T-note yield is down 2 basis points at 4.978%. The yield has an inverse relationship with gold prices.

An 83% probability of a Fed rate increase at the December meeting was priced into money markets at the time of writing. Attention now turns to Fed Chair Kevin Warsh's press conference. Although he does not provide guidance, his remarks could indicate the central bank’s next step.

Despite its role as an inflation hedge, gold tends to struggle when interest rates are high, a point traders should bear in mind. Hawkish comments from Warsh could put XAU/USD under renewed pressure, with a break below $4,000 possible.

For further indications of the interest-rate outlook, traders are also watching the forthcoming US Personal Consumption Expenditures (PCE) data — the Fed's preferred inflation gauge. The November 3 US midterm elections are another event investors are preparing for.

$4,000 draws Gold buyers; $4,050 next: XAU/USD technical analysis

A reversal is taking shape in gold after its slide to a two-month low of $3,975. The metal is close to forming a ‘bullish engulfing’ candlestick pattern, pointing to further gains. A rising Relative Strength Index (RSI) supports the rebound, but the 14-day RSI is still bearish and could limit the advance.

At $4,100, XAU/USD faces its initial resistance. A break would bring the psychological $4,150 level into view, 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.

Should the bearish trend resume, XAU/USD would find initial support at $4,000, then at October’s 23-day low of $3,975. Further key support lies at the July 17 low of $3,959 and the year-to-date (YTD) trough of $3,941.

Gold: frequently asked questions

What makes Gold attractive to investors?

Throughout human history, gold has served extensively as both a store of value and a means of exchange, giving it a central role. Today, its appeal extends beyond its lustre and use in jewellery. The precious metal is broadly regarded as a safe-haven asset and therefore a suitable investment during periods of turmoil. Because it does not depend on a particular issuer or government, gold is also widely considered a hedge against inflation and currency depreciation.

Which buyers hold the most Gold?

The largest holders of gold are central banks. To underpin their currencies during unsettled 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 World Gold Council data, central banks increased their reserves by 1,136 tonnes of gold, valued at around $70 billion, in 2022. That was the largest annual purchase on record. Emerging-market central banks, including those in China, India and Turkey, are rapidly expanding their gold reserves.

How does Gold move relative to 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 holdings during turbulent periods. Gold also tends to move in the opposite direction to risk assets. Equity market gains generally weigh on its price, while selling in riskier markets typically benefits the precious metal.

Which factors drive Gold prices?

Several factors can shift gold prices. Its safe-haven appeal means geopolitical unrest or concerns about a severe recession can trigger rapid gains. Since gold pays no yield, lower interest rates generally support it, while a higher cost of borrowing usually puts pressure on the metal. The US Dollar (USD), however, drives most price movements because gold is quoted in dollars (XAU/USD). Dollar strength tends to restrain gold prices; a weaker Dollar is more likely to lift them.