Gold declines to near $4,350 on rising odds of Fed rate hike
- Gold price drifts lower to around $4,365 in Tuesday’s early Asian session.
- Fed’s Musalem said more rate hikes are likely needed to cool prices.
- Hopes for diplomatic progress between the US and Iran might cap gold’s downside.
Gold price (XAU/USD) declines to near $4,365, snapping the two-day winning streak during the early Asian session on Tuesday. The precious metal loses ground on the prospect of further monetary tightening by the US Federal Reserve (Fed). Traders will keep an eye on the Fedspeak later on Tuesday.
Hawkish signals from the Fed over the possibility of further interest rate hikes weigh on the yellow metal. Last week, the US central bank raised interest rates by a quarter of a percentage point to the 3.75%-4.0% range. Traders are now pricing in nearly a 90.3% chance of a US rate hike in December, according to the CME FedWatch Tool.
St. Louis Fed President Alberto Musalem said on Monday that additional interest rate increases may be needed to achieve the central bank’s inflation goal, adding that monetary policy may still be stimulating the economy after this month’s hike. Higher interest rates typically weigh on gold because the precious metal does not pay interest, making yield-bearing assets relatively more attractive.
"We are seeing some lingering concerns among the bulls about tighter US monetary policy, which has pushed the US dollar index to a more than two-month high on Friday. Those bearish elements are working against the precious metals," said Jim Wyckoff, a market analyst at American Gold Exchange.
On the other hand, Middle East diplomacy hopes and easing supply concerns might help limit gold’s losses. CNBC reported on Monday that Iran’s President Masoud Pezeshkian will go to the United Nations General Assembly in New York on Tuesday, amid renewed hopes for a diplomatic solution to the Middle East conflict.
Gold softens as Fed rate hike reinforces higher-for-longer narrative
Analysts at ING note that gold "edged lower at the start of the week as investors assessed the implications of the Federal Reserve's first rate hike since 2023 and the prospect of further policy tightening." They highlight that comments from Fed officials have "reinforced concerns that inflation remains elevated," in turn "supporting expectations that rates will stay higher for longer." ING cautions that "tighter monetary policy remains a headwind for bullion," but also points to supportive underlying flows, with "ETF holdings...sitting at a six-month high" and "continued central bank buying" expected to "help limit downside."
Musalem flags need for earlier, incremental hikes as inflation risks persist
Musalem’s speech scores 8/10 on the FXS Speechtracker, modestly above the 7.4/10 historical average and signaling a distinctly hawkish tilt relative to the established baseline. The warning that without further policy restraint inflation is likely to remain substantially above the 2% target in 18 months, alongside the view that interest rates need to rise further to tackle both demand- and supply-driven pressures, underscores a preference for pre-emptive tightening even as the labor market is seen as near full employment and not the main source of inflation. Additional emphasis on broad commodity shocks beyond oil, persistent underlying inflation near 3%, and business plans for price increases closer to 3% reinforces the message that the current policy stance is not yet sufficiently restrictive.
The FXS Fed Sentiment Index rose by 0.42 points to 149.96, deep in hawkish territory and consistent with the above-baseline tone captured by the FXS Speechtracker. This elevated level signals that, in aggregate, Fed communication is firmly skewed toward further policy tightening, a backdrop that should remain supportive of the Dollar against lower-yielding peers.
Technical Analysis: Gold is well-supported above the 100-day SMA
In the daily chart, XAU/USD sits just under the 20-day Bollinger simple moving average, keeping the topside mildly capped, while holding above the 100-day simple moving average (SMA), which underpins the broader uptrend. The Relative Strength Index (RSI) at 49.95 is neutral, suggesting a consolidative phase as price fluctuates around the recent opening pivot at $4,363.65 rather than showing a clear directional impulse.
On the topside, initial resistance is seen at the Bollinger middle band around $4,405, ahead of a stronger barrier at the upper band near $4,615. On the downside, immediate support is provided by the 100-day SMA at $4,320, with a deeper cushion at the lower Bollinger band around $4,200, where buyers would be expected to defend the prevailing medium-term bullish structure if the current range breaks lower.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.