Gold rebounds to near $3,900 despite inflation worries

Gold prices briefly rose to around $3,895 early Monday, after slipping to a low of $3,870 the previous day. However, the upside appears limited due to rising oil prices and concerns about inflation, which suggest a possible US interest rate increase. Traders are bracing for a potentially volatile week due to Middle East tensions, US employment data, and the midterm elections.

Meanwhile, Ukraine has resumed attacking Russian oil refineries despite pressure from US President Donald Trump ahead of the midterm elections, ending a two-week pause. Iran’s Supreme Leader has also ordered his military commanders to prepare for renewed conflict with the US and Israel.

The Federal Reserve maintained its key interest rate at its October meeting, but remains committed to reducing inflation. Currently, there is a 72.9% probability of a US rate hike in December, according to the CME FedWatch tool. Higher interest rates make holding non-yielding gold less attractive.

Simon-Peter Massabni, Head of Business Development at XS.com, noted that the recent gold recovery has stalled as prices have slipped back towards the $4,000 mark despite easing US Treasury yields and oil prices. OCBC strategists argue that economic data will be crucial in determining if markets reassess the interest-rate outlook, shifting expectations toward a pause in tightening or rate cuts. As of now, gold is likely to remain under selling pressure, despite its medium- to long-term positive outlook.

OCBC also highlighted that gold's inability to benefit from lower yields suggests limited fresh buying interest. They noted that renewed weakness in technology equities may further weaken sentiment. They remain cautious about the near-term outlook, with further consolidation or another test of recent lows not ruled out. They particularly emphasize watching Friday's Employment Cost Index, along with equities, yields, and the USD.

Fed's new speech included a hawkish message, with a speechtracker score of 8/10, slightly above the historical average. This indicates a firm commitment to tighter policy, even if a pause in meetings does not alter the policy destination. The index is currently well above the neutral 100 mark, signaling incremental hawkish pressure on the Dollar, aligning with the speaker's call for additional tightening despite the possibility of a near-term pause.

Gold continues to be a key store of value and safe-haven asset during turbulent times. Central banks, particularly in emerging economies, are increasing their gold reserves, seeing it as a hedge against currency depreciation and inflation. Currently, XAU/USD has declined below all major reference bands and the 100-day SMA, indicating strong bearish momentum.

The next resistance level is near $3,910, followed by the mid-band at $4,085 and the 100-day SMA at $4,210. To potentially reverse the bearish trend, gold must reclaim these levels.