Gold rebounds to near $4,350 on weaker US Dollar, falling oil prices

Gold prices soared near $4,345 during the early Asian trading session on Friday following a decline in oil prices and a weakening US Dollar. Traders are closely monitoring the latest Federal Reserve rate hike and policy cues. Oil prices dropped to a one-week low due to the potential easing of Middle East supply disruptions, as Saudi Arabia seeks to restore flows through a key pipeline.

Furthermore, President Donald Trump is set to meet Gulf leaders during the UN General Assembly in New York, discussing the next steps in the Iran conflict. These developments have lessened inflation concerns and may support the yellow metal in the short term. Analyst David Meger from High Ridge Futures explained that falling energy prices have reduced inflationary pressures, thereby providing relief to the gold market.

However, the possibility of additional US interest rate hikes could impose selling pressure on gold, as higher rates make yield-bearing assets more appealing. The Federal Reserve raised rates by 25 basis points to a range of 3.75% to 4.00% on Wednesday, with multiple rate increases still expected this year. This has led traders to price in a 53.1% chance of another hike at the upcoming Fed meeting in October.

OCBC strategists note that gold "reversed lower after the FOMC" due to stronger USD and rising UST yields, keeping the opportunity-cost channel in focus. They believe that near-term elevated yields and a stronger USD may cap gold, but the Fed outcome does not necessarily undermine the broader medium-term case. With a "hawkish rate path already in the price," OCBC contends that "softer US data could pull yields and the dollar lower again," potentially restoring support for the metal in the medium term.

The XAU/USD chart shows a constructive near-term bias, as the price is above the 100-day moving average and the lower Bollinger Band, indicating that buyers are still supporting the uptrend. However, the middle Bollinger Band is above the price, serving as immediate resistance, while the RSI at 48.58 suggests a neutral state, indicating a consolidation phase rather than a strong directional move.

Resistance lies at the Bollinger SMA center line near $4,435 and the upper Bollinger Band around $4,678, where upside momentum may appear stretched. Meanwhile, support is weak at the 100-day MA around $4,325, with deeper bearish pressure likely around the lower Bollinger Band near $4,190. Gold has historically been used as a store of value and medium of exchange, and today it is viewed as a safe-haven asset during turbulent times.

As it does not rely on any issuer or government, central banks hold the largest amounts of gold to support their currencies and strengthen economic perception. Central banks added a record 1,136 tonnes of gold worth $70 billion to their reserves in 2022, with emerging economies like China, India, and Turkey rapidly increasing their gold holdings.

Gold has an inverse relationship with the US Dollar and US Treasuries, both major reserve and safe-haven assets. When the Dollar depreciates, gold typically rises, enabling diversification of assets in turbulent times. Gold is also inversely correlated with risk assets, with stock market rallies weakening its price and sell-offs in riskier markets favoring it.

Geopolitical instability or fears of a deep recession can lead to a surge in gold prices due to its safe-haven status. As a yield-less asset, gold tends to increase with lower interest rates, while higher interest rates usually weaken the yellow metal. Nevertheless, most moves depend on how the US Dollar behaves, as gold is priced in dollars (XAU/USD). A strong Dollar keeps gold prices in check, while a weaker Dollar could push gold prices higher.