Gold defies US Dollar surge as US yield slide revives Bullion demand

Gold prices increased modestly, with a gain of over 0.40% on Thursday, as US Treasury yields fell after the release of inflation data on Wednesday, leading to a reduction in expectations of aggressive Federal Reserve actions at the October meeting. The XAU/USD exchange rate is currently at $4,175, up 0.4%. Earlier this week, the Federal Reserve's preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, came in at 3.4% year-over-year, unchanged from the previous period and below expectations of a 3.3% increase.

This shift in market sentiment has led to a significant change in expectations, with traders now seeing an 83% probability of a December rate hike, down from a 70% chance after the latest report. Despite the US Dollar Index (DXY) rising 0.61% to 102.08, Fed officials have remained cautious, stating that the economy is near maximum employment and that patience is required for rate adjustments.

Minneapolis Fed President Neel Kashkari, however, has continued to advocate for additional rate hikes. The latest data shows that the US ISM Manufacturing PMI in September fell slightly from 54.6 to 54.5, missing forecasts of 55, while the Prices Paid sub-component rose to 77.1, suggesting growing inflationary pressure. The employment index component also increased from 51.2 to 52.7.

US jobless claims for the week ending October 26 were 197K, lower than expected at 200K and down from the previous week's 198K. Given these factors, gold trading should anticipate a further decline, although the upward trend in US Treasuries offers some support for the non-yielding metal. The 10-year Treasury yield has dropped by more than 4 basis points to 5.243%.

Oil prices have been rising due to speculation about potential escalation in the US-Iran conflict following the US midterm elections in November. Additionally, China's oil exports are being restricted in favor of boosting domestic demand, which could tighten fuel markets that are already experiencing worldwide supply shortages. The upcoming US economic calendar includes the September Nonfarm Payrolls report and additional Fed remarks.

The price action indicates that gold faces strong resistance at $4,200, after breaking below a potential Bullish Wedge pattern which, once negated, suggests further losses are possible. Momentum is currently favoring buyers, but the overall trend remains bearish, with the Relative Strength Index (RSI) below the 50 neutral level.

For a bullish continuation, XAU/USD must regain the $4,200 level. Following this, the metal would need to challenge the 100-day Simple Moving Average (SMA) at $4,283, and then the 50-day SMA at $4,324. On the downside, the first support level is the low of the day (LOD) at $4,139, which, if broken, could push gold down to $4,100.

Further support lies at the July 29 swing low of $3,996 and the July 17 low at $3,959. If these levels are also surpassed, the next area of interest would be the year-to-date (YTD) low at $3,941. Gold has been a significant part of human history, serving as a store of value and medium of exchange. Currently, in addition to its luster and use in jewelry, gold is widely regarded as a safe-haven asset, sought after during turbulent times.

It also serves as a hedge against inflation and currency depreciation, as its value is not tied to any specific issuer or government. Central banks are the largest holders of gold, diversifying their reserves to support their currencies in times of instability. In 2022, central banks added 1,136 tonnes of gold worth approximately $70 billion to their reserves, marking the highest annual purchase since records began.

Most gold price movements are influenced by the behavior of the US Dollar, as the asset is priced in dollars (XAU/USD). A stronger dollar generally limits gold prices, while a weaker dollar tends to push them up.