Gold stalls below $4,200 as inflation fears rise

Bullion retreats as yields climb and Hormuz risks return

The yellow metal seems poised to consolidate after failing to clear a downward-sloping resistance trendline near $4,200, which exacerbated XAU’s drop towards the $4,150 area. Recent data from the NY Fed showed that inflation expectations rose to their highest level since September 2023.

The NY Fed Survey of Consumer Expectations indicated increasing concern among Americans about the high cost of living, with one-year inflation expectations climbing from 3.5% in May to 3.7% in June. Further data showed that the Goods and Services Trade Balance deficit widened from $-54.6 billion in April to $-77.6 billion in May, below estimates of $-78 billion.

The de-anchoring of inflation expectations could be a reason for Fed officials to raise interest rates. Additionally, reports from the Middle East indicated that two ships were attacked by the Iranian Revolutionary Guard Corps (IRGC), as reported by Iran’s Fars agency, which fueled fears that energy prices could reaccelerate ahead of the US-Iran talks resumption.

Oil prices immediately edged higher, underpinning the Greenback due to their positive correlation. At the time of writing, Western Texas Intermediate (WTI), the US crude Oil benchmark, is up over 2.70% to $70.48 per barrel. At the same time, the US Dollar Index (DXY), which measures the buck’s performance against a basket of six currencies, trades at 199.97, up 0.12%.

Another reason to consider is that US Treasury yields are rising. The US 10-year Treasury yield has risen by 5.5 basis points to 4.525%. Despite this, money markets are sceptical of a rate hike at the July 29 meeting, but for September, the odds are near 60%, according to Prime Market Terminal.

The World Gold Council reported that the People’s Bank of China (PBoC) added further Gold reserves for the 20th consecutive month, with stockpiles hitting 75.44 million fine troy ounces at the end of June, up from 74.96 million a month earlier.

Investors' eyes shift towards the release of the latest FOMC meeting minutes on Wednesday, followed by Thursday's jobless claims for the week ending July 4.

XAU/USD technical outlook: Gold remains bearish below $4,200, sellers eye $4,000

Gold’s downtrend is set to extend further if XAU fails to break a resistance line at around $4,200-$4,225. Furthermore, the formation of a 'death-cross' on the daily chart indicates that sellers are gaining traction, which could lead to further declines.

The Relative Strength Index (RSI) remains bearish despite nearing the neutral 50 level. Over the past two trading sessions, it has indicated potential for additional downside.

Bullion’s path of least resistance is downwards. The first support is the $4,150 figure, followed by the psychological $4,100 mark. A breach of the latter will expose the $4,050 milestone, which lies ahead of the $4,000 figure and the year-to-date low at $3,941.

For a bullish turnaround, Gold must clearly break above $4,250 and then aim for $4,300. Resistance levels include the 50-day SMA at $4,391 and the 200-day SMA at $4,488, with $4,500 also in sight.

Gold FAQs

Why do people invest in Gold?

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.

Who buys the most Gold?

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.

How is Gold correlated with other assets?

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.

What does the price of Gold depend on?

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.