Why is gold falling near $4,000 as strong US GDP boosts Fed hike expectations?

Gold slides more than 1% to $4,019, ending a three-day run of gains.
US GDP growth picks up to 3.4% during Q3, as Core PCE inflation climbs to 3.1% for September.
Despite recent repricing, the probability of a December Fed rate hike stays high at 81%.

Selling pressure drives Gold (XAU/USD) more than 1% lower on Thursday, with a batch of US economic releases strengthening the case for a further interest rate hike by the Federal Reserve (Fed) at its December 9 meeting. Having touched a high of $4,069, XAU/USD is trading at $4,019 at the time of writing.

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

Can XAU/USD withstand firming December rate hike expectations as growth holds up and inflation stays high?

Down 0.18% at 101.96, the US Dollar Index (DXY) points to further losses for the Greenback against a basket of six peer currencies. The decline followed the Federal Reserve’s decision to leave interest rates unchanged and the absence of forward guidance from Fed Chair Kevin Warsh on Wednesday.

According to Prime Terminal, money markets now assign an 81% probability to a 25-basis-point rate hike, down from the 84% priced in immediately after the decision.

An initial advance took Gold to $4,035, but the release of US data reversed those gains and brought prices back to current levels. Q3 Gross Domestic Product (GDP) expanded 3.4% YoY, beating the 3.2% forecast and accelerating from the previous quarter’s 2.2%. Meanwhile, the Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure, increased to 3.1% YoY, in line with expectations. The reading suggests that further work remains for the Fed to fulfil its price stability mandate.

Alongside the growth and inflation releases, labour market figures also showed continued strength. Initial Jobless Claims eased to 194K in the week ending October 24 from 195K, coming in below the forecast of 199K.

Efforts by US Vice President JD Vance to restart peace talks helped ease Middle East tensions. Vance wrote to Mohsen Rezaei, head of Iran’s Supreme National Security Council, in a bid to revive negotiations. Despite a drift lower in Oil prices, expectations of higher interest rates have prevented a recovery in bullion.

After touching a low of 4.949%, the US 10-year Treasury yield is unchanged at 4.999%. Together with uncertainty over the outcome of the November 3 US midterm elections, this is keeping Gold prices steady.

On next week’s economic calendar are the ISM Manufacturing and Services PMI, Factory Orders, the JOLTS survey and Initial Jobless Claims, alongside October’s Nonfarm Payrolls report.

XAU/USD technical outlook: Can $4,000 hold as sellers target the YTD low below $3,970?

Sellers retain control of Gold after XAU/USD slipped beneath Wednesday’s daily low of $4,025. A break below $4,000 would put last week’s low of $3,975 in focus. With the Relative Strength Index (RSI) moving lower towards oversold territory, momentum points to further losses.

A move above $4,100, however, would allow buyers to regain some influence. That would open the way towards $4,200, ahead of the 100-day Simple Moving Average (SMA) at $4,217 and the 50-day SMA at $4,269.

Gold: frequently asked questions

What makes Gold an investment choice?

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

Which buyers hold the largest Gold reserves?

The largest holders of Gold are central banks. To support their currencies during unsettled periods, they typically diversify reserves and purchase Gold, seeking to strengthen perceptions of both their economies and currencies. Substantial Gold reserves can bolster confidence in a country’s solvency. World Gold Council data show that central banks increased their reserves by 1,136 tonnes of Gold, valued at around $70 billion, in 2022. No larger annual purchase has been recorded since records began. Emerging-economy central banks, including those in China, India and Turkey, are rapidly expanding their Gold holdings.

How does Gold move in relation to other assets?

Both the US Dollar and US Treasuries are major reserve and safe-haven assets, and Gold generally moves inversely to them. Dollar weakness tends to lift Gold, offering investors and central banks a way to diversify their holdings during turbulent periods. The metal also has an inverse relationship with risk assets: rising stock markets tend to weigh on Gold prices, whereas selling in riskier markets generally supports the precious metal.

Which factors influence Gold prices?

A variety of forces can influence Gold prices. Given its safe-haven appeal, geopolitical turmoil or concerns about a severe recession can send the metal sharply higher. Gold pays no yield, so lower interest rates tend to support it, while a higher cost of borrowing generally puts pressure on prices. Most price movements nevertheless hinge on the US Dollar (USD), as Gold is quoted in dollars (XAU/USD). Dollar strength typically restrains Gold prices, while a weaker Dollar is likely to lift them.