Quick Summary
- Gold prices are experiencing a decline, dropping over 4% this week due to increased investor appetite for risk driven by new US-Asia trade agreements.
- The precious metal reached a three-week low earlier today and is currently trading just above $3,900.
- Developments in US-China trade talks are contributing to market optimism, suggesting a potential avoidance of a full-blown trade war.
- Technically, gold prices are showing a bearish correction from recent highs, with key Fibonacci retracement levels being tested.
Gold Prices Fall Amidst Positive Trade News
Gold is trading lower for the third consecutive day, depreciating by more than 4% this week. This downward trend is attributed to new trade agreements between the US and Asian countries, which are bolstering investors’ appetite for risk and weakening safe-haven assets like gold. The precious metal touched a fresh three-week low of $3,886 earlier today before recovering to levels just above $3,900 at the time of reporting.
Gold is trading lower for the third consecutive session as improved risk sentiment weighs on the safe-haven asset.
The recent signing of an agreement between US President Donald Trump and Japanese Prime Minister Sanae Takaichi regarding rare earth supplies has notably supported investor confidence. However, the primary focus remains on the upcoming Trump-Xi summit. Positive advancements in weekend talks between US and Chinese representatives in Malaysia, coupled with de-escalation signals, particularly from the US, have fueled hopes that a global trade war can be averted.
Technical Outlook for Gold
A review of the 4-hour charts indicates an immediate bearish trend. Gold prices are undergoing a correction after achieving a rally of over 30% since late August. The inability to reclaim the previous support level at $4,010 on Monday has confirmed the continuation of this negative trend.
The current price action is testing the 61.8% Fibonacci retracement of the bull run observed between September 18 and October 17, located around the $3,920 area. An A-B=C-D correction pattern might lead to a target within the range of $3,795 to $3,830. This zone represents the confluence of the September 30 and October 2 lows, along with the 78.2% Fibonacci retracement of the aforementioned cycle.
Potential Resistance and Support Levels
Upside attempts are expected to face resistance at the October 22 low, near $4,010, and the $4,150 mark, which corresponds to the highs from October 22 and 23. Further upward movement could encounter resistance at the $4,185 area, a former support level, before challenging the all-time high, which is situated close to $4,380.
Understanding Gold as an Asset
Historical and Current Role of Gold
Gold has played a significant role throughout human history, serving as a store of value and a medium of exchange. Beyond its aesthetic appeal and use in jewelry, gold is widely recognized today as a safe-haven asset, considered a prudent investment during times of economic uncertainty. It also functions as a hedge against inflation and currency depreciation, as its value is not tied to any specific government or issuer.
Central Banks and Gold Reserves
Central banks are the largest holders of gold. To bolster their currencies during volatile periods, they often diversify their reserves by purchasing gold, thereby enhancing the perceived strength of their economy and currency. Substantial gold reserves can serve as a indicator of a nation’s solvency. According to the World Gold Council, central banks acquired 1,136 tonnes of gold, valued at approximately $70 billion, in 2022, marking the highest annual purchase on record. Notably, central banks in emerging economies, including China, India, and Turkey, have been rapidly expanding their gold reserves.
Gold’s Correlation with Other Assets
Gold exhibits an inverse correlation with the US Dollar and US Treasuries, both of which are considered major reserve and safe-haven assets. Typically, when the US Dollar depreciates, gold prices tend to rise, offering investors and central banks an avenue for asset diversification during tumultuous periods. Furthermore, gold is inversely correlated with risk assets; a rally in the stock market often leads to a weakening gold price, whereas sell-offs in riskier markets tend to favor the precious metal.
Factors Influencing Gold Prices
Gold prices are sensitive to a variety of factors. Geopolitical instability or fears of a severe recession can rapidly drive up gold prices due to its safe-haven status. As an asset that does not yield interest, gold tends to perform well in environments with lower interest rates, while higher borrowing costs usually put downward pressure on its price. However, much of gold’s price movement is dictated by the behavior of the US Dollar, as the asset is priced in dollars (XAU/USD). A strong dollar typically caps gold prices, whereas a weaker dollar is likely to push gold prices higher.
Final Thoughts
Gold prices are currently experiencing downward pressure, driven by positive developments in international trade relations and a subsequent increase in investor risk appetite. Technical indicators suggest a bearish correction is in play, with key support levels being tested.