Gold (XAU/USD) saw a correction on Wednesday, with prices consolidating after hitting a new all-time high near $4,526 earlier in the day. Volatility increased during the Asian session amid tight holiday liquidity ahead of Christmas, prompting modest profit-taking at higher levels. At the time of writing, XAU/USD is trading around $4,483, up more than 3% this week.
Bullion’s historic rally this year has been nothing short of remarkable, with prices up more than 70% year to date, putting gold on track for its strongest annual performance since 1979. The rally is driven by strong safe-haven demand amid persistent geopolitical risks and economic uncertainties, as well as strong institutional and investment flows.
Another major factor behind gold’s historic rally is the widespread weakness in the US Dollar (USD), driven by US President Donald Trump’s protectionist trade rhetoric and monetary policy easing by the Federal Reserve (Fed).
The Fed cut rates by a cumulative 75 basis points (bps) through 2025. Markets are also expecting two additional rate cuts next year. This environment continues to support demand for the precious metal as low interest rates reduce the opportunity cost of holding non-yielding assets like gold.
Looking ahead, gold may consolidate in the near term, as lack of new market catalysts and more profit-booking before year-end may put some pressure on prices. That said, the broader uptrend remains strongly intact, suggesting that the rally is likely to continue through 2026.
Market Movers: Fed outlook and geopolitics support gold
- The market digested the last batch of key economic data before the holiday period. Initial jobless claims fell to 214K from 224K the previous week, which came in below the 223K market forecast. Meanwhile, continued jobless claims rose to 1.923 million from 1.885 million in the previous week, while the four-week average of initial claims dropped to 216.75K from 217.5K.
- On Tuesday, the US Bureau of Economic Analysis released preliminary estimates of third-quarter gross domestic product (GDP), which was delayed due to the recent government shutdown. The report shows that the US economy expanded at an annual pace of 4.3% in Q3, exceeding both the prior estimate of 3.8% and the market expectation of 3.3%.
- The upbeat GDP figures contrast with soft US data elsewhere. Durable goods orders declined 2.2% in October, while industrial production declined 0.1% month-on-month in October and rose 0.2% in November. Meanwhile, Conference Board consumer confidence fell to 89.1 in December from a revised 92.9 in November, putting the US dollar on the back foot.
- The US dollar index (DXY), which tracks the value of the greenback against a basket of six major currencies, traded around 97.87, close to its lowest level since October 3.
- On the monetary policy front, the market broadly expects the Fed to keep rates unchanged in its January meeting. Chairman Jerome Powell said at a December policy meeting that the Fed is “well positioned to wait and see how the economy develops.” The CME FedWatch tool shows just a 13% chance of a rate cut in January. Still, investors expect the central bank to return to accommodative stances at the end of the year amid signs of easing inflation and a weakening labor market.
- Elevated geopolitical tensions, with the Russia-Ukraine conflict, continued instability in the Middle East and rising tensions between the United States and Venezuela are weighing on market sentiment.
Technical Analysis: Bearish RSI divergence increases correction risks
On the daily chart, Momentum indicators suggest the rally is overstretched, with the Relative Strength Index (RSI) hovering in overbought territory and showing early signs of fatigue, while a bearish divergence is starting to take shape.
The broader bullish structure remains firmly intact, as prices are trading well above key moving averages. On the downside, the previous all-time high near $4,381 could act as a first line of defense, followed by the 9-day simple moving average (SMA) around $4,372.
A decisive break below this short-term average could expose the 50-day SMA near $4,167, where buyers are likely to re-emerge.
On the positive side, the psychological level of $4,500 stands as immediate resistance, ahead of a possible retest of the fresh all-time high at $4,526. A sustained break above this zone could open the door for a further move towards the $4,600 handle.
Meanwhile, the Average Directional Index (ADX) is rising and above 30 points, indicating that the strength of the underlying trend remains strong, even if momentum cools off in the near term.
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 depreciating 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. According to World Gold Council data, central banks added 1,136 tonnes of gold, worth about $70 billion, to their reserves in 2022. 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.
