Breaking: $3,900 gives way as gold plunges, YTD low in focus

Below $3,900: Gold slides to a four-month low.
Bullion faces pressure from robust US growth and high Core PCE inflation.
70% December Fed hike probability, down from 84% following Wednesday's decision.

Gold fell below $3,900 on Friday. The sell-off took prices to a fresh year-to-date (YTD) low despite investors scaling back expectations of Federal Reserve policy tightening. At the time of writing, XAU/USD is down almost 3%.

Robust US economic releases this week have supported the Greenback. Growth remained strong, while employment figures pointed to a resilient labour market. Together with a very hot Core PCE reading, these data weigh on bullion despite easing US Treasury yields.

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

Dollar-denominated gold is under pressure from the strengthening US Dollar. Higher oil prices, driven by the escalating Middle East conflict, are also adding to the US currency's appeal.

Investors nevertheless remain sceptical about a December interest rate increase following Wednesday's Federal Reserve decision and the absence of forward guidance from Chair Kevin Warsh.

According to Prime Terminal pricing, the probability now stands at 70%, compared with 84% after the Fed meeting.

5-minute gold price chart

Gold: Key Questions

Gold's investment appeal

Widely used to preserve value and facilitate exchange, gold has held an important place throughout human history. Beyond its lustre and role in jewellery, the precious metal is now broadly 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 use as a hedge against inflation and currency depreciation.

Gold's largest buyers

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 their economies and currencies. Substantial gold reserves can reinforce 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. That was the largest annual purchase since records began. Emerging-market central banks, including those in China, India and Turkey, are expanding their gold reserves rapidly.

Gold's relationship with other assets

Both the US Dollar and US Treasuries are major reserve and safe-haven assets, and gold is inversely correlated with them. A weaker Dollar generally supports gold, allowing investors and central banks to diversify their holdings during turbulent periods. The metal also has an inverse relationship with risk assets. Rising equity markets typically put pressure on gold prices, whereas selling in riskier markets tends to support the precious metal.

Key drivers of gold prices

Many factors influence gold prices. Its safe-haven role means geopolitical turmoil or concerns about a severe recession can trigger rapid gains. Gold pays no yield, so lower interest rates generally support it, while a higher cost of borrowing usually creates pressure. Most price movements, however, hinge on the US Dollar (USD), since gold is quoted in dollars (XAU/USD). Dollar strength typically restrains gold prices; a weaker Dollar is likely to lift them.