Gold plunges over 2% as Middle East energy shock fuels inflation worries
- Gold trades on the back foot as higher-for-longer interest rate expectations weigh on demand.
- Markets expect the Fed to hold rates next week before raising them again in December.
- Technically, XAU/USD tests lower Bollinger Band support as selling pressure builds.
Gold (XAU/USD) extends losses below $4,100 on Thursday, falling more than 2% as energy-driven inflation concerns from Middle East tensions reinforce expectations that interest rates will remain elevated longer. At the time of writing, XAU/USD trades around $4,053, its lowest level since August 4.
The New York Times reported that the United States (US) and Israel have drawn up plans for renewed strikes against Iran after the US midterm elections, potentially targeting the country's energy infrastructure.
Meanwhile, tensions between Saudi Arabia and the Houthis continue to escalate, with fresh attacks reported on Saudi Arabia's Shaybah oil field and King Fahd International Airport. The US State Department has also ordered non-emergency government employees and their family members to leave Saudi Arabia.
Fresh geopolitical headlines have raised concerns about further disruptions to Middle East energy supplies, keeping oil prices elevated. West Texas Intermediate (WTI) crude trades around $98.50 near five-week highs.
The ongoing energy shock has pushed inflation above central bank targets across major economies, prompting policymakers to raise borrowing costs. Higher interest rates reduce the appeal of the non-yielding metal despite its traditional role as a safe-haven asset and an inflation hedge. The longer the conflict drags on, the longer central banks may need to keep monetary policy restrictive.
Traders now look ahead to next week's Federal Reserve (Fed) meeting, where the US central bank is widely expected to leave interest rates unchanged after raising them by 25 basis points (bps) in September. Markets will closely watch for clues about the Fed's interest rate path, as traders price in another rate hike in December, with the CME FedWatch Tool placing the odds at 89%.
These hawkish expectations keep dip-buying interest in the US Dollar intact after its recent correction from multi-month highs, triggered by falling US Treasury yields as concerns over AI-related investments weigh on equities and drive demand for government bonds.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.75 after hitting a three-week low of 101.45. The benchmark 10-year US Treasury yield stands at around 5.06%, down over 1% on a daily basis.
Despite the recent decline, US Treasury yields remain elevated, and combined with a firmer US Dollar and prospects of higher interest rates, Gold is likely to remain on the back foot, with any recovery likely to attract fresh selling interest.
Technical analysis: XAU/USD slips below lower Bollinger Band
On the daily chart, XAU/USD tumbles below the lower Bollinger Band near $4,063, while trading below the 20-period Simple Moving Average (SMA), which forms the middle Bollinger Band around $4,151, keeping the near-term bias tilted to the downside.
The Relative Strength Index hovers in the mid-30s, hinting at lingering downside pressure, while the Moving Average Convergence Divergence (MACD) stays marginally positive but has rolled over, suggesting that recent recovery momentum is fading rather than strengthening.
On the upside, initial resistance is seen at the 20-period SMA near $4,151, followed by the upper Bollinger Band around $4,240. A sustained break above these levels could open the door toward $4,400, followed by the $4,500 psychological mark.
On the downside, immediate support lies at the lower Bollinger Band near $4,063. A clear break below this level could expose the $4,000 psychological mark, followed by the June lows around $3,950.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.
Author
Vishal Chaturvedi
FXStreet
I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.
