Near $4,000: Gold falls as strong US GDP bolsters Fed rate hike expectations

$4,019: Gold retreats over 1%, ending three consecutive days of gains.
3.4% US GDP growth in Q3 marks an acceleration, as Core PCE inflation rises to 3.1% in September.
81% odds of a December Fed hike remain high despite recent market repricing.

$4,019 is the price of Gold (XAU/USD) at the time of writing. The metal has fallen over 1% on Thursday from a session high of $4,069. A series of US economic releases strengthened the case for another interest rate increase by the Federal Reserve (Fed) at its December 9 meeting.

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

December Hike Expectations Strengthen: XAU/USD Slides on Firm Growth and High Inflation

Down 0.18% at 101.96, the US Dollar Index (DXY) signals further losses for the Greenback against its six peers. The decline followed Wednesday’s Federal Reserve decision to leave rates unchanged and the absence of forward guidance from Fed Chair Kevin Warsh.

According to Prime Terminal, money markets now assign an 81% probability to a 25-basis-point rate increase. That is down from the 84% priced in immediately after the decision.

Before the US data were released, Gold advanced to $4,035, then reversed to its current levels. Third-quarter Gross Domestic Product (GDP) expanded 3.4% YoY, exceeding the 3.2% forecast and accelerating from 2.2% in the preceding quarter. The Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure, also climbed to 3.1% YoY, in line with expectations. The reading indicates that further work is needed to fulfil the Fed’s price stability mandate.

Alongside the growth and inflation figures, labour market data showed continued resilience. Initial Jobless Claims fell to 194K in the week ending October 24 from 195K, coming in below the 199K forecast.

A letter from US Vice President JD Vance to Mohsen Rezaei, head of Iran's Supreme National Security Council, sought to restart peace talks, helping ease Middle East tensions. Oil prices edged down, but expectations of higher interest rates prevented bullion from recovering.

At 4.999%, the US 10-year Treasury yield is unchanged after touching a low of 4.949%. Together with uncertainty surrounding the November 3 US midterm elections, this is keeping Gold prices steady.

On next week’s economic calendar are the ISM Manufacturing and Services PMI, Factory Orders, the JOLTS survey, Initial Jobless Claims and October’s Nonfarm Payrolls report.

$4,000 in Focus: XAU/USD Sellers Target YTD Low Below $3,970

Below Wednesday’s daily low of $4,025, XAU/USD remains under sellers’ control. A break beneath $4,000 would put last week’s $3,975 low in sight. The Relative Strength Index (RSI) is moving lower towards oversold territory, with momentum favouring further declines.

A move above $4,100, by contrast, would allow buyers to regain some control. The next upside level would then be $4,200, ahead of the 100-day and 50-day Simple Moving Averages (SMAs), at $4,217 and $4,269 respectively.

Gold: Key Questions

Gold Investment: What Attracts Investors?

Throughout human history, Gold’s widespread use as both a store of value and a medium of exchange has given it a central role. Beyond its lustre and use in jewellery, the precious metal is now widely regarded as a safe-haven asset, making it a favoured investment in turbulent periods. Its independence from any particular issuer or government also underpins its broad appeal as a hedge against inflation and currency depreciation.

Gold Holdings: Who Are the Largest Buyers?

The largest holders of Gold are central banks. To support their currencies during periods of turmoil, they typically diversify reserves and purchase Gold, reinforcing perceptions of economic and currency strength. Substantial Gold reserves can bolster confidence in a country’s solvency. World Gold Council data show that central banks increased their reserves by 1,136 tonnes in 2022, valued at around $70 billion. That marked the largest annual purchase since records began. Emerging-economy central banks, including those in China, India and Turkey, are rapidly expanding their Gold reserves.

Gold Correlations: How Do Other Assets Affect It?

Both the US Dollar and US Treasuries are major reserve and safe-haven assets, and Gold is inversely correlated with them. A weaker Dollar typically lifts Gold, allowing investors and central banks to diversify their holdings during turbulent periods. Risk assets also have an inverse relationship with Gold. Stock market gains generally weigh on the metal, whereas selling in riskier markets tends to support it.

Gold Prices: What Drives Their Direction?

Many factors influence Gold prices. Its safe-haven appeal means geopolitical instability or concerns over a severe recession can trigger rapid gains. Gold pays no yield, so lower interest rates generally support it, while a higher cost of money usually puts pressure on the metal. Most price movements, however, hinge on the US Dollar (USD), since Gold is priced in dollars (XAU/USD). Dollar strength tends to restrain Gold prices; a weaker Dollar is likely to lift them.