Gold extends correction amidst trade optimism, stronger US Dollar
- Gold price slides towards the lower $3,300 region on Tuesday, seeking support near a key level.
- Market sentiment improves amid trade talks optimism, dampening safe-haven demand.
- A stronger US Dollar gains momentum after Japan considers reducing its debt issuances.
Gold (XAU/USD) price extends correction, sliding below the $3,300 mark at the time of writing on Tuesday amid improving risk-on mood and a stronger US Dollar (USD). Gold extends its decline for a second day this week as the US dollar caught up with some gains and demand for haven assets cooled, with investors also weighing prospects for improving trade relations between the US and the EU after US President Donald Trump said on Sunday that he agreed to an extension on the 50% tariff deadline on the European Union (EU) until July 9.
The stronger USD gained momentum at the end of Asian trading after the Japanese Ministry of Finance (MoF) stated that its bond issuance plan might see some tweaking, with lower volumes. This made Japanese yields collapse and saw the Japanese Yen (JPY) devalue against the US Dollar, triggering a spillover effect in favor of the Greenback against several other major currencies. A stronger US Dollar makes Gold more expensive for most buyers, and thus it is seen as a headwind.
Daily digest market movers: Some headwinds at play
- Demand for safer assets like Gold has been impacted as signs emerge that the White House may be making progress in negotiations with some trading partners. Gold-backed Exchange Traded Funds (ETFs) registered five straight weeks of outflows since peaking at the highest in more than a year in mid-April, Bloomberg reports.
- One of China’s biggest Gold miners is planning its second US Dollar bond offering in two weeks, the latest in a slew of global companies looking to tap growing investor interest in the precious metal. Shandong Gold Group is considering issuing a roughly $100 million perpetual bond as soon as this week. The potential sale comes after it already raised $300 million via a three-year bond offering earlier this month, Bloomberg reports.
- Harmony Gold Mining Co. has agreed to buy MAC Copper Ltd., enabling the top producer of South African Gold to gain a further foothold in Australia and increased exposure to Copper. Harmony is offering $12.25 for each MAC share, implying a total equity value for the Australian company of about $1.03 billion, Reuters reports.
- There are still tailwinds at play, with markets remaining in wait-and-see mode, weighing several risks, including the swelling US deficit, ongoing trade talks, and worsening conflicts in the Middle East and Ukraine.
Gold Price Technical Analysis: Downside pressure appears
Some downside pressure appears on Gold’s price this week. The headwinds mentioned above could be proven quite persistent, as the US Dollar has already experienced a long stretch of devaluation and is due for some recovery at the expense of the precious metal. Add some more possible positive signs on trade talks, and any prospects of Gold extending its highs might fall short of expectations.
On the upside, the daily Pivot Point at $3,341 is the first level to look out for, followed by the R1 resistance at $3,359. Further up, the R2 resistance at $3,374 follows not far behind and could open the door for a return to the $3,400 round level and potentially further course to $3,440, coinciding with May 6 and May 7 peaks.
On the other side, some thick-layered support emerges in case the Gold price declines. In case the $3,300 mark breaks, some intermediary support could come from the S2 support at $3,275. Further below, there is a technical pivotal level at $3,245 (April 11 high).
XAU/USD: Daily Chart
Gold FAQs
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.
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.
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.
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.