Gold drops below $4,000 as hawkish Fed expectations overshadow risk-off sentiment

Can Gold find support at its lowest since July as hawkish Fed expectations sustain selling pressure?

Selling pressure persists in Gold (XAU/USD) on Friday despite risk aversion across financial markets, with the metal touching $3,965 in Asian trade, its weakest level since July. Expectations of additional interest rate increases by the Federal Reserve (Fed) remain the dominant influence on prices, putting Gold on course for a monthly loss. XAU/USD is trading near $3,979 at the time of writing, a decline of nearly 1% for the day.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Risk appetite has weakened after disappointing technology earnings revived doubts over substantial AI spending and the adequacy of returns from those investments. A shift towards government bonds has lowered US Treasury yields, pulling the US Dollar down alongside them.

Losses in the US Dollar Index (DXY) have now extended into a third straight day, with the index trading near 101.65. The gauge measures the Greenback against a basket of six major currencies.

For the Dollar, positioning could matter more than fundamentals in the near term, according to analysts at ING. They warn that “the main risk for the dollar today is some precautionary unwinding of net-long positions ahead of Tuesday’s US midterm elections.” Pointing out that “a Democratic sweep is trading around 68% in prediction markets,” they describe that outcome as “slightly negative for the US dollar from a few angles, from higher risk of government shutdown and gridlock on debt ceiling negotiations to potential damage to already shaky AI-related sentiment.”

ING consequently warns that “resurgent AI-related jitters and the upcoming US midterms are increasing downside risks for the dollar,” while acknowledging that “a still-hawkish Fed argues against major corrections.”

Investor unease has also deepened following reports of a major security breach at cryptocurrency exchange Binance, which have put digital assets under pressure. Yet the defensive market mood has offered no support to Gold so far. Traders remain focused on the rise in Oil prices linked to Middle East tensions and the implications for inflation and interest rates.

Fears that the US may restart military strikes against Iran after next week’s US midterm elections have driven Oil to its highest levels since May. With West Texas Intermediate (WTI) trading above $103 a barrel, inflation risks stemming from energy remain a key concern.

The risk from rising energy costs is that inflation could remain above the Fed’s 2% target for an extended period. Thursday’s data showed September headline Personal Consumption Expenditures (PCE) inflation increasing 0.5% MoM and 3.6% YoY. The core reading, meanwhile, rose 0.3% MoM and 3.1% YoY.

Following the Fed’s decision to hold rates steady in October, traders are assigning roughly a 75% probability to a December rate increase, according to the CME FedWatch Tool. Since Gold pays no interest, an increase in borrowing costs typically puts the metal under pressure.

Technical analysis: Could XAU/USD extend its decline below $4000?

Sellers retain the upper hand on the daily XAU/USD chart, where a sequence of lower highs and lower lows has developed since the late-August peak near $4,700. Gold remains beneath its 50-day, 100-day and 200-day Simple Moving Averages (SMAs). Buying interest appears muted, with the Relative Strength Index (RSI) around 34, while a negative Moving Average Convergence Divergence (MACD) reading points to continuing downward pressure.

On the upside, Gold faces its first resistance at $4,000 and then $4,100. Further hurdles are the 100-day SMA near $4,218 and the adjacent 50-day SMA at $4,257. If the recovery gathers strength, attention could turn to horizontal resistance at $4,400, ahead of the 200-day SMA around $4,491.

Below the $4,000 level, where Gold is already trading, the nearest support is $3,950, with the July low near $3,941 next in line. A clear break beneath this zone would leave room for additional declines.

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

Gold: Frequently asked questions

What makes Gold an investment choice?

During periods of uncertainty, Gold is widely regarded as a safe-haven asset and, therefore, a sound investment in turbulent conditions. Its importance in human history stems from its extensive use as both a store of value and a means of exchange. Today, its appeal extends beyond its lustre and use in jewellery. Because Gold does not depend on a particular issuer or government, it is also commonly viewed as protection against inflation and currency depreciation.

Which institutions are the largest Gold buyers?

The largest holdings of Gold sit with central banks. To support their currencies during unsettled periods, they often spread their reserves across assets and purchase Gold, strengthening perceptions of their economies and currencies. Substantial Gold reserves can reinforce confidence in a country’s solvency. According to World Gold Council data, central banks expanded their reserves by 1,136 tonnes of Gold, valued at around $70 billion, in 2022. No other year since records began has seen purchases on that scale. Emerging-economy central banks, including those in China, India and Turkey, are rapidly building their Gold reserves.

How does Gold move in relation to other assets?

Both the US Dollar and US Treasuries are major reserve and safe-haven assets, and Gold has an inverse relationship with them. A fall in the Dollar typically supports Gold, allowing investors and central banks to diversify their holdings during uncertain periods. The metal also tends to move in the opposite direction to risk assets: stock-market gains generally put pressure on Gold prices, whereas selling in riskier markets usually benefits the precious metal.

Which factors influence Gold prices?

Several influences can drive Gold prices. Demand for its safe-haven qualities can send prices sharply higher when geopolitical instability rises or fears of a severe recession emerge. Lower interest rates generally support Gold because it generates no yield, while higher borrowing costs usually weigh on the metal. Nevertheless, the direction of the US Dollar (USD) determines most price movements, as Gold is quoted in dollars (XAU/USD). Dollar strength tends to restrain Gold prices; a weaker Dollar, by contrast, is likely to lift them.