Gold advances as diplomacy optimism and Fed uncertainty undermine USD

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Gold (XAU/USD) builds on the previous day's goodish rebound from sub-$4,650 levels and gains some follow-through positive traction during the Asian session on Tuesday.

Gold attracts follow-through buyers on Tuesday as hopes for Iran diplomacy undermine the USD.
Doubts over future rate moves by the Fed also weigh on the USD and benefit the XAU/USD pair.
Inflation risks due to the instability in the Strait of Hormuz limit USD losses, capping the bullion.

Gold (XAU/USD) builds on the previous day's goodish rebound from sub-$4,650 levels and gains some follow-through positive traction during the Asian session on Tuesday. Despite failed US-Iran peace talks over the weekend, investors seem hopeful that the door for diplomacy remains open and that negotiations will continue. Apart from this, the uncertainty over future interest rate moves by the US Federal Reserve (Fed) weighs on the US Dollar (USD), which is seen offering support to the bullion.

US Vice President JD Vance struck a cautiously optimistic tone on negotiations with Iran and said during an interview on Fox News that meaningful progress has been made, even as talks have yet to deliver a breakthrough. Vance further added that the framework for a comprehensive agreement is achievable if Iran is willing to take the next step. The optimism, in turn, remains supportive of a generally positive risk tone and undermines the Greenback's global reserve currency status, benefiting USD-denominated commodities, including Gold.

Meanwhile, an energy shock caused by widening conflict in the Middle East has been fueling worries around a possible spike in inflationary pressures. Moreover, data released on Friday showed that the US consumer inflation rose by the most in nearly four years in March due to the war-driven surge in energy prices, shifting focus on potential rate hikes this year. However, the CME Group's FedWatch Tool is indicating a 30% chance of a 25-basis point (bps) rate cut in December, which further undermines the USD and benefits the non-yielding Gold.

The aforementioned supportive factors lift the XAU/USD pair to the $4,777 area in the last hour, though the uptick lacks bullish conviction amid the continued instability in the Strait of Hormuz. US President Donald Trump said that the U.S. Navy blockade on the strategic waterway has officially started and vowed to destroy Iranian warships that get nearby. Iran responded with threats on all ports in the Persian Gulf and the Gulf of Oman. This keeps geopolitical risks in play, which holds back the USD bears from placing aggressive bets and caps the Gold price.

XAU/USD 4-hour chart

Gold lacks bullish conviction amid mixed technical setup

Against the backdrop of the previous day's goodish rebound, a subsequent strength beyond the 50% retracement level of the March downfall could be seen as a key trigger for the XAU/USD bulls. The precious metal, however, remains capped beneath the 200-period Simple Moving Average (SMA) at $4,854.58, which keeps the broader tone mildly bearish.

Meanwhile, the Relative Strength Index (RSI) near 57 leans to the bullish side of neutral, while the Moving Average Convergence Divergence (MACD) histogram has contracted toward the zero line. This, in turn, suggests that the downside pressure is waning but not yet convincingly reversed.

Hence, any subsequent move up might continue to confront initial resistance located at the 200-period SMA around $4,855, followed by the 61.8% Fibonacci retracement at $4,913. A break above the latter would open the way toward $5,133 and the $5,413 cycle high.

On the downside, immediate support is seen at the 50% retracement near $4,759, with additional cushions at the 38.2% level at $4,604 and then $4,413. A drop through these Fibonacci floors would expose the broader structural base toward $4,104.

(The technical analysis of this story was written with the help of an AI tool.)

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.