• Gold falls 0.43% despite declining US Treasury yields.
• October Fed hike odds stand at 14%, rising for December.
• BoE and BoJ tightening signals weigh on XAU’s recovery prospects.

Gold (XAU/USD) drifts lower on Tuesday even as US Treasury yields dive and the US Dollar weakens, with a light US economic docket mostly ignored by investors ahead of Federal Reserve’s (Fed) meeting next week. At the time of writing, XAU/USD trades at $4,122, down over 0.43%.

XAU/USD slips despite weaker Dollar and yields as central banks signal further tightening

Overall, bullion is poised to consolidate further after last week’s remarks by Fed officials that they are not in a rush to hike rates in October, which investors considered. Consequently, money markets have priced in a 14% chance for an October Fed hike, but for December, the odds are near 90%, according to Prime Terminal.

This week, the US economic schedule is very light. Fed officials commenced their blackout period, which will end with Fed Chair Kevin Warsh's press conference on October 28.

Meanwhile, investors are leaning on US housing data, which showed the effect of higher US bond yields: high mortgage rates are the main reason US Pending Home Sales collapsed by 7.3% in September. Ahead in the week, investors eye Initial Jobless Claims for the week ending on Thursday, forecast to rise from 199K to 200K. Alongside this, S&P Global Flash PMIs will provide an update on sentiment among businesses in the US, and the University of Michigan Consumer Sentiment Index will release its final reading for October.

Major central banks expected to increase rates

In the meantime, officials from major central banks are signaling further monetary policy tightening, a headwind for Gold, which usually fares well in low-interest-rate environments.

Bank of Japan (BoJ) Governor Kazuo Ueda recognized that core inflation is “quite close” to the 2% goal, though hinted at further rate hikes. Bank of England (BoE) Megan Greene said that the risks of second-round inflation effects are higher than thought, adding that the current policy stance “is not restrictive enough.”

XAU/USD technical analysis: Gold pressured below $4,200, eyes on $4,100

Gold trades laterally within $ 4,100 and $4,200, extending its losses for the third straight day, even though it has shown signs of bottoming out near the lower end of the range. Nevertheless, uncertainty continues to weigh on bullion prices, with speculation that the Fed could raise rates in December.

Momentum favors further downside as the Relative Strength Index (RSI) remains bearish, although it has flattened somewhat.

For a bearish continuation, sellers must clear $4,100. Once surpassed, the next stop is the October 14 low at $4,073, ahead of the July 29 cycle low at $3,996. On further weakness, the next areas of interest are the July 17 low at $3,959 and the year-to-date (YTD) low at $3,941.

For a bullish reversal, XAU/USD’s first resistance is $4,200, followed by the 100-day Simple Moving Average (SMA) at $4,235. Above sits the 50-day SMA at $4,321, with the $4,500 mark above it.

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.

Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.