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Gold Prices Continue to Rise as the Increasing Tensions in the Middle East Boost the Attraction of Safe-Haven Investments

Leon Kramer

ByLeon Kramer

Jan 22, 2024
Gold Prices Continue to Rise as the Increasing Tensions in the Middle East Boost the Attraction of Safe-Haven Investments

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  • The price of Gold has continued to rebound, reaching a level close to $2,030, as the value of the US Dollar steadily declines.
  • The Gold price pullback loses some credibility as traders have reduced their expectations for a Federal Reserve interest rate cut in March.
  • The positive US Retail Sales figures indicate potential upward pressures on US inflation.

The price of Gold (XAU/USD) continued to climb during Friday’s European session, driven by increased demand for safe-haven assets amidst the escalating conflict in the Middle East. In addition to the conflict in Gaza, disputes between Houthi rebels and the United States armed forces are growing in the crucial commercial shipping route that spans the Red Sea. In addition, Pakistan conducted military operations in Iran on Thursday in response to a comparable incursion by Iran on its soil. 

In this particular situation, the valuable metal has experienced a notable rebound. Still, the prospects in the short term have yet to become optimistic as any potential gains are limited due to decreasing expectations for an interest-rate reduction by the Federal Reserve (Fed).

The future of inflation in the United States still needs to be determined. The rate of price increase is slowly decreasing. However, the most recent data indicates that the economy is robust, primarily because of solid household expenditure. This contributes to the rise in inflationary pressures and increases the likelihood of the Federal Reserve keeping a tight monetary policy stance for an extended duration. 

The Federal Reserve is expected to maintain interest rates at their current levels of 5.25%- 5.50% during the upcoming central bank policy meeting on January 31, marking the fourth consecutive time without any changes. Market participants will closely examine the remarks regarding how the Federal Reserve plans to incorporate the anticipated three reductions in interest rates during the remaining seven policy meetings of 2024. 

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Meanwhile, the US Dollar Index (DXY) has made an effort to rebound following the remarks made by Chicago Fed Bank President Austan Goolsbee. A Fed policymaker expressed the view that adjustments to policy rates may be necessary if the central bank continues to make strides in addressing inflation. Goolsbee emphasized the importance of further reducing housing inflation to achieve a sustained decrease in price pressures. He cautioned that interest rates may increase if inflation takes a downturn. 

Gold Prices Continue to Rise Despite the Concerns in the Middle East

  • The price of Gold continues to rebound, nearing the $2,030 mark, as the US Dollar has stabilized following a significant upward surge. 
  • Escalating geopolitical tensions also supports the rise in the price of Gold, leading to a greater demand for safe-haven assets.
  • The demand for secure assets is optimistic as the Iran military faction is anticipated to respond to the airstrikes conducted by the US military against Houthis in Yemen.
  • Despite positive economic factors, the price of Gold is predicted to finish the week on a negative note. This is due to reduced expectations of rate cuts by the Federal Reserve, which can be attributed to a steady labor market, strong consumer spending, and a persistent inflation outlook. 
  • According to the CME Group Fedwatch tool, traders are now estimating a 53% probability of a 25 bps interest rate reduction in March. This figure has significantly decreased from the previous week’s estimate, which was above 70%.
  • The December US Retail Sales showed strong performance, driven by a significant surge in the demand for motor vehicles and online purchases. This sets a promising outlook for the year ahead. A rise in the retail market has heightened concerns about the continued presence of inflation. The number of initial jobless claims in the US dropped to 187K for the week ending January, which is lower than the expected 203K and the previous reading of 207 K. This suggests a positive outlook for labor demand, even though the Federal Reserve is keeping interest rates at elevated levels.
  • Robust economic indicators bolster the case for maintaining a tight monetary policy.
  • Atlanta Federal Reserve Bank President Raphael Bostic endorsed a decrease in interest rates but emphasized the importance of waiting until the latter part of this year, contingent upon a decline in inflation towards the desired 2% target.
  • Bostic advised against hasty interest rate reductions, as they have the potential to impede the ongoing efforts to maintain price stability. In addition, implementing rate cuts in the early stages may increase consumer demand and undermine the overall efforts to control inflationary pressures. Bostic supported two rate reductions this year, deviating from the Federal Reserve’s average forecasts of three rate cuts.

More Than $2,030 Is the Target for the Gold Price to Stabilize

The price of Gold surged past $2,030 on Friday. The valuable metal made a strong recovery after attracting purchasing interest close to the significant support level of $2,000. The gold price experienced a recovery after finding support from the 50-day Exponential Moving Average (EMA), which is currently valued at approximately $2,017.

Nevertheless, the gold price bulls are still facing resistance from the 20-day EMA, which is around $2,035. The 14-period Relative Strength Index (RSI) experienced a recovery after reaching levels close to 40.00.

Potential for further gains may arise if Gold can maintain a steady position above the $2,030 resistance level. Conversely, a decline in value could gather momentum if it falls below the significant support level of $2,000.

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Leon Kramer

Leon Kramer

Leon Kramer, a renowned financial author, enlightens Main Forex News readers with his deep understanding of currency markets. His years in global finance, combined with an intuitive grasp of trends, delivers insightful, up-to-the-minute foreign exchange analysis.

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