On Tuesday, the price of gold (XAU/USD) steadied around the $2,330 mark amidst ongoing geopolitical uncertainties, which are fueling demand for this safe-haven asset. Nevertheless, potential gains might be limited due to recent US data suggesting that interest rates are likely to stay high for the foreseeable future, diminishing the appeal of gold, which offers no yield.
Gold Prices Stabilize Amid Geopolitical Tensions
On Tuesday, gold prices stabilize as escalating geopolitical tensions drive up demand for the safe-haven commodity.
Growing unrest regarding Israel’s presence in Gaza, Russia’s expansion into Ukraine, and concerns over global trade disruptions have heightened the geopolitical risk, boosting interest in gold as a safe investment.
IMF Alert: Global Trade Faces Growing Risks
In a speech at the Stanford Institute for Economic Policy Research on Monday, Gita Gopinath, the IMF’s First Deputy Managing Director, cautioned that nations are reassessing their trade relationships, considering both economic factors and national security. She warned that if this trend persists, it could lead to a widespread departure from global trade norms, resulting in a substantial rollback of the benefits derived from economic interconnectedness.
The fragmentation of trade alliances along geopolitical lines is being influenced by Western and US sanctions imposed on countries like Russia, Iran, and other emerging markets. In response, investors and central banks are increasingly stockpiling gold.
Gold Emerges as Alternative to the US Dollar
The shift away from the US Dollar as the primary medium of international trade by BRICS nations has heightened interest in gold as a potential substitute. This surge in demand for gold, particularly from non-Western central banks, has led to a decrease in US Dollar reserves.
According to the Carnegie Endowment for International Peace, a consulting firm headquartered in Washington, gold is being considered as a viable alternative to the US Dollar for securing value in international trade agreements involving nations with unstable domestic currencies.
US Data Puts Cap on Gold Prices
The potential for upward movement in gold prices may be restrained, as indicated by survey findings from the Reserve Bank of New York revealing that US consumers anticipate continued inflation in retail prices over the next year. This data suggests that the Federal Reserve might extend the duration of elevated interest rates to combat inflation.
Released on Monday, April’s New York Consumer Sentiment report indicated a rise in one-year-ahead inflation expectations to 3.3%, up from 3.0% in March, a level sustained since November 2023. This figure notably surpasses the Federal Reserve’s 2.0% target, indicating a probable prolongation of higher interest rates by the Fed.
Given that gold doesn’t generate interest, it becomes less appealing when real interest rates are elevated. According to data from the Federal Reserve Bank of Cleveland, real interest rates—calculated as the interest rate minus inflation—remain relatively high, increasing the opportunity cost associated with holding non-yielding assets like gold.
Technical Analysis: Gold Price Finds Support After Backslide
The price of gold (XAU/USD) has stabilized after experiencing a decline in recent trading sessions. It dropped below a significant support level established around $2,350, but has now recovered and is being supported just above another notable high point near $2,330.
Despite undergoing a significant downward correction, the valuable metal maintains a positive short-term trajectory. Following the adage “the trend is your friend,” it’s likely to rebound and drive prices upward once more. Presently, there are no clear indications that the upward trend is restarting, although the downward momentum during the pullback has subsided temporarily.
If the upward trend does resume, Gold’s next target is anticipated to be approximately $2,400, aligning closely with April’s peak levels. Confirmation would be signaled by a resurgence above the $2,378 high recorded on May 10.
Both the daily and weekly charts indicate bullish sentiment in the medium and long term, providing a supportive framework for Gold’s prospects.
