Gold is seeing a dead cat bounce from over one-month lows of $4,501 early Tuesday, but sellers are likely to jump back in amid sustained haven demand for the US Dollar (USD) and renewed tensions around the Strait of Hormuz.
Gold looks south amid US-Iran re-escalation
Markets remain risk-aversion and continue to underpin the Greenback, checking any upside attempts in the USD-sensitive Gold.
The US-Iran tensions, concerning the Strait of Hormuz, are re-escalating, fanning inflation concerns amid the recent surge in Oil prices.
This concerns resurfaced after the US military said it fired on Iranian forces and sank six small boats targeting civilian ships as it moved to reopen the strait on Monday.
The UAE, a key US ally, said its air defences had engaged 15 missiles and four drones fired by Iran.
Iran, however, did not outright confirm or deny the attacks but Iranian Foreign Minister Abbas Araghchi said that both the US and the UAE “should be wary of being dragged back into quagmire”.
Earlier on Tuesday, Iranian media reported, , citing a military source, that US struck two civilian vessels transporting goods to Iran. But those vessels were not linked to the Islamic Revolutionary Guard Corps (IRGC), the report said.
If the US-Iran tensions in the Strait intensify further, Gold could continue facing a double-whammy, remaining vulnerable to downside risks.
Inflation fears will likely double down hawkish expectations around the US Federal Reserve’s (Fed) interest rate outlook, acting as headwind to non-yielding assets such as Gold.
Meanwhile, the USD will remain the go-to safety bet, and also as the world’s reserve currency, keeping the downside potential intact in Gold unless signs of de-escalation appear on the Strait.
All eyes remain on whether the ceasefire, which has been in place since early April, could fall apart as tension over Strait of Hormuz ramps up again.
Gold price technical analysis: Daily chart
In the daily chart, XAU/USD trades at $4,540.20, holding a bearish near-term bias as it remains capped beneath the 21-day simple moving average (SMA) at $4,701.91 and the denser cluster of the 100-day and 50-day SMAs at $4,766.49 and $4,808.32, respectively. The pair still trades above the 200-day SMA at $4,293.14 and an upward-sloping support trend line around $4,382.60, but the downward resistance trend line near $4,607.28 and a subdued Relative Strength Index (14) at 39.12 suggest that rallies are likely to be sold while the metal stays below these overhead barriers.
On the topside, immediate resistance emerges at the descending trend-line cap around $4,607.28, followed by the 21-day SMA at $4,701.91; a sustained break above this zone would open the way toward the 100-day SMA at $4,766.49 and then the 50-day SMA at $4,808.32. On the downside, initial support is seen near the recent price area, with stronger backing at the broken-uptrend region around $4,382.60, ahead of the 200-day SMA at $4,293.14, where buyers would be expected to defend the broader bullish cycle.
(The technical analysis of this story was written with the help of an AI tool.)
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
