According to the newswire, the price of gold (XAU/USD) consolidated above the $4,200 mark on Friday as market participants are optimistic about a potential US-Iran deal, which is likely to be signed next week. Meanwhile, households in the US are becoming more optimistic about the economy. The XAU/USD pair is trading at $4,216, up 0.11%.
XAU/USD steady as deal talks underpin strong yields
Investors’ mood turned optimistic amid news that the Middle East conflict could end if Washington and Tehran move to sign an Islamabad memorandum of understanding (MOU). There is growing speculation about the signing at the G7 meeting in Geneva, Switzerland, but an Iranian Foreign Ministry spokesman said Iran’s decision-making bodies are meeting on the MOU and he could not confirm details of the memorandum.
If both sides agree, the Strait of Hormuz would reopen, which could lower energy prices and ease inflationary pressure on major central banks, which have expressed concerns about energy shocks resulting from the conflict.
During the year central banks such as the Reserve Bank of Australia (RBA) and the European Central Bank (ECB) increased rates by 75 and 25 basis points respectively. However, a quick resolution of the conflict could prevent others such as the Reserve Bank of New Zealand (RBNZ), the Bank of England (BoE), and the Federal Reserve (Fed) from tightening policy.
Despite this, US Treasury yields are moving higher, with the 10-year T-note rising 1.5 basis points to 4.477%, which is unfavorable for the yellow metal. Meanwhile, the US Dollar Index (DXY), which measures the US currency’s performance against six currencies, was steady at 99.77, up 0.06%.
Data during the day showed US households are becoming more optimistic as US consumer sentiment improved to 48.9 in June from 44.8 in a preliminary reading, while inflation expectations for one year fell to 4.6% from 4.8%.
Earlier this week, US inflation data increased speculation that the Fed could raise rates at least once this year. But since the news of a possible agreement between America and Iran, it has decreased from about 88% to 67%.
Next week, the US economic docket will see the release of the Fed’s monetary policy decisions, the first under new Chairman Kevin Wersh, the Summary of Economic Estimates (SEP) and Retail Sales.
XAU/USD Technical Outlook: Gold rises above $4,200 on US-Iran war deal
Gold price remains neutral to downside bias, even though it gained 3.50% on Thursday, clearing the way for a move above $4,200. Momentum is tilted to the downside, as shown by the Relative Strength Index (RSI), but its recent break above the 30 level has opened the door for buyers to push prices higher in the near term.
The first major resistance level is $4,250. A breach of the latter would highlight the $4,300 mark, followed by the 200-day simple moving average (SMA) at $4,450, which is ahead of $4,500.
On the downside, the first support for XAU/USD lies at $4,200. The key psychological level below this level is $4,150, which is ahead of the June 11 daily lows of $4,023 and $4,000.
Sona FAQ
Gold has played an important role in human history as it has been widely used as a store of value and medium of exchange. Currently, apart from its luster and use for jewellery, the precious metal is widely viewed as a safe-haven asset, meaning it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and falling currencies because it is not dependent on any specific issuer or government.
Central banks are the largest holders of gold. In their aim to support their currencies in turbulent times, central banks diversify their reserves and purchase gold to improve the perceived strength of the economy and currency. High gold reserves can be a source of confidence for a country’s solvency. Central banks added 1,136 tonnes of gold, worth about $70 billion, to their reserves in 2022, according to World Gold Council data. This is the highest annual purchase since records began. Central banks of emerging economies like China, India and Türkiye are rapidly increasing their gold reserves.
Gold has an inverse relationship with the US dollar and US Treasuries, which are both major reserve and safe-haven assets. When the dollar depreciates, gold rises, helping investors and central banks diversify their assets in turbulent times. Gold is also inversely correlated with risky assets. Stock market rallies weaken the price of gold, while selling in riskier markets benefits the precious metal.
The price may increase due to a variety of factors. Gold’s safe-haven status could cause its price to rise sharply due to geopolitical instability or fears of a deep recession. As a yield-low asset, gold tends to rise with low interest rates, while higher costs of money generally weigh on the yellow metal. Still, most of the moves depend on how the US dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong dollar keeps the price of gold in check, while a weak dollar is likely to push gold prices higher.
