Gold Extends Pullback as Higher Yields Weigh on Bulls

Key Moments

Fed Rate Expectations and Yields Weigh on Bullion

Gold (XAU/USD) is trading about 0.55% lower near $4,540 in Tuesday’s European session, as persistent strength in United States Treasury yields continues to pressure the metal. Market participants expect the Federal Reserve to keep interest rates unchanged through the rest of the year, dampening demand for non-yielding assets such as gold.

At the time of writing, the 10-year US Treasury yield is nearly unchanged around 4.63%, a level not seen in more than a year. In theory, higher returns on interest-bearing instruments reduce the relative attractiveness of assets that do not provide income, including gold.

Stronger Dollar Adds to Headwinds

The US Dollar’s advance is adding another layer of pressure on bullion. The US Dollar Index (DXY), which tracks the currency against six major peers, is up 0.33% and trading near 99.30. A stronger dollar typically makes dollar-denominated gold less appealing from a risk-reward standpoint for many investors.

According to the CME FedWatch tool, there is nearly a 51% probability that the Fed will maintain rates at current levels for the remainder of the year, while the balance of positioning favors at least one additional rate increase. Traders have been unwinding expectations for a dovish Fed stance as US inflation has risen markedly, driven in part by higher oil prices.

Technical Picture: Bias Remains to the Downside

Spot gold is currently trading near $4,540.00, keeping a bearish short-term setup intact. The metal is holding clearly below the 20-day Exponential Moving Average (EMA) at $4,646.25, and the sustained move under this dynamic resistance leaves prices under corrective pressure.

The Relative Strength Index (RSI) stands at 40.04, tilting toward negative momentum but not yet indicating oversold conditions. This leaves room for either further downside or a prolonged consolidation phase beneath the 20-day EMA.

On the upside, the 20-day EMA at $4,646.25 is the first important barrier. A daily close above this level would be required to alleviate immediate selling pressure and could pave the way for a more meaningful rebound toward the May 12 peak at $4,773.60.

On the downside, if XAU/USD cannot defend the May 18 low at $4,480.58, the price could retreat further toward the $4,400 area.

Gold as an Investment: Key Characteristics

Gold has held a prominent place throughout human history, serving as both a store of value and a medium of exchange. Beyond its visual appeal and widespread use in jewelry, the metal is broadly regarded as a safe-haven asset, often favored during periods of market or geopolitical stress. Investors also view gold as a hedge against inflation and currency depreciation, as its value does not depend on any specific government or issuer.

Central Banks and Gold Holdings

Central banks are the largest holders of gold globally. To support their currencies during periods of uncertainty, monetary authorities frequently diversify their reserves by adding gold, which can bolster confidence in a country’s financial strength and solvency. High levels of gold reserves are often seen as a signal of economic resilience.

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 represented the highest annual purchase since records began. Institutions in emerging markets, including China, India and Turkey, have been rapidly increasing their gold holdings.

Relationship With Other Major Assets

Gold typically shows an inverse relationship with both the US Dollar and US Treasuries, which are themselves key reserve and safe-haven assets. When the dollar declines, gold often rises as investors and central banks seek diversification in unsettled market environments.

The metal also tends to move opposite to risk assets. Strong advances in the stock market frequently coincide with softer gold prices, while risk-off episodes and equity sell-offs generally support demand for the precious metal.

Drivers of Gold Prices

Gold prices can be influenced by a broad range of factors. Episodes of geopolitical tension or concerns about a severe economic downturn can spur rapid gains in the metal due to its safe-haven appeal. As a yield-less asset, gold usually benefits from falling interest rates and faces headwinds when borrowing costs rise.

However, a significant portion of gold’s fluctuations is tied to the performance of the US Dollar, as the metal is priced in USD (XAU/USD). A stronger dollar tends to limit upside in gold, while a weaker dollar often supports higher prices.