Gold prices decline in the face of the strength of the US dollar
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- Gold fell slightly in late trading, still up 0.40% on the week amid geopolitical tensions.
- Mixed US economic data; Rising housing construction rates and lower building permits have a slight impact on bullion.
- Fed Governor Waller’s dovish comments suggest the possibility of early interest rate cuts.
The price of gold fell late in the North American session, but is set to end the week with gains of more than 0.40% as market participants await the inauguration of US President-elect Donald Trump. Although the XAU/USD pair is trading at $2,701, down 0.44%, investors continued to buy the gold metal due to political uncertainty.
The precious metal continues to be driven by geopolitics and politics in the United States. Although US Treasury yields at the belly of the curve remained unchanged, bullion buyers failed to push prices higher for additional gains before the weekend.
The US economic calendar showed that the number of housing starts jumped by double digits, despite a contraction in building permits in December. Gold barely reacted to the news, as most of the data revealed during the week, led by retail sales on Thursday, suggested that the economy was strong.
The US Dollar Index (DXY), which measures the US dollar’s performance against a basket of six peers, rose 0.35% to 109.34.
Other data revealed during the Asian session showed that the Chinese economy achieved a GDP growth rate of 5% in 2024, according to the National Bureau of Statistics.
On Thursday, Federal Reserve Governor Christopher Waller leaned cautiously and commented that the US central bank could lower borrowing costs faster and faster if a deceleration in inflation develops.
Market participants are pricing in near-equal odds that the Fed will cut rates twice by the end of 2025 and see the first cut in June.
source: Main market station
Next week, the US economic docket will include the US Presidential Inauguration, the release of initial jobless claims and flash PMI data.
Daily summary of market drivers: Gold price is under pressure ahead of the weekend
- Gold fell as real yields remained flat on Friday. Measured by the yield on 10-year Treasury Inflation Protected Securities (TIPS), it was almost unchanged at 2.18%.
- The 10-year US Treasury yield was unchanged at 4.618%, representing a headwind for the gold metal.
- Home construction starts in the United States jumped from 1.294 million to 1.499 million in December, a jump of 15.8% on a monthly basis.
- Building permits contracted for the same period as permits fell from 1.493 million to 1.483 million, a decrease of 0.7%.
- The latest inflation data and Waller’s comments from the Fed have put pressure on the US dollar, as traders become confident that the Fed will cut interest rates sooner rather than later. Waller did not rule out a cut at the March meeting because inflation is “close to the 2% inflation target.”
Technical Forecast for XAU/USD: Gold is flat near $2,700
Gold prices fell amid lack of catalysts ahead of the weekend. However, buyers should keep XAU/USD prices above $2,700, so they can remain optimistic about pushing the yellow metal towards its December 12 high of $2,726. Once this level is crossed, the next stop will be $2,750, followed by the all-time high of $2,790.
On the other hand, failure of buyers to achieve the aforementioned result could mean that gold could test the swing lows recorded on January 13 at $2,656, followed by the confluence of the 50- and 100-day SMAs at $2,639-$2,642.
Frequently asked questions about gold
Gold has played a major role in human history as it has been widely used as a store of value and a medium of exchange. Currently, apart from its luster and use in jewellery, the precious metal is widely viewed as a safe haven asset, meaning it is a good investment during turbulent times. Gold is also widely viewed as a hedge against inflation and currency depreciation because it is not dependent on any specific issuer or government.
Central banks are the largest holders of gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase gold to improve the perceived strength of the economy and the currency. High gold reserves can be a source of confidence for a country’s solvency. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse relationship with the US dollar and US Treasuries, which are major reserve assets and safe havens. When the value of the dollar declines, 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 rise in the stock market tends to weaken the price of gold, while a sell-off in riskier markets tends to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession could cause the price of gold to rise rapidly due to its safe-haven status. As a lower-yielding asset, gold tends to rise as interest rates fall, while a higher cost of money usually negatively impacts the yellow metal. However, most of the moves depend on how the US Dollar (USD) behaves as the asset is priced in Dollars (XAU/USD). A stronger dollar tends to keep the price of gold in check, while a weaker dollar is likely to push gold prices higher.