Gold prices reached a new record high last week, marking an impressive eight consecutive weeks of gains. The precious metal's continued ascent has been bolstered by a combination of factors, including fresh selling of the US Dollar (USD) and inflation concerns, which are providing robust support for the XAU/USD pair. The daily Relative Strength Index (RSI) remains above the 70 mark, indicating slightly overbought conditions.
Central banks play a pivotal role in the gold market as the largest holders of the metal. Their strategic moves to diversify reserves by purchasing gold are aimed at improving the perceived strength of their economies and currencies. This trend was evident in 2022 when central banks added 1,136 tonnes of gold, valued at approximately $70 billion, to their reserves, according to data from the World Gold Council.
Gold's inverse correlation with the US Dollar and US Treasuries further accentuates its appeal as a safe-haven asset. Uncertainty surrounding former US President Donald Trump's trade tariffs and their potential impact on the global economy has heightened interest in gold as a refuge from market volatility. Geopolitical tensions and a bearish sentiment towards the USD also contribute to the commodity's strength.
Despite these bullish factors, gold prices face certain headwinds. Stronger US consumer inflation figures suggest that the Federal Reserve (Fed) will maintain steady interest rates for an extended period, which poses a challenge for the non-yielding yellow metal. Market expectations that the Fed might follow the UK's example by cutting rates more than anticipated add another layer of complexity.
The flash S&P Global US Composite PMI dropped to 50.4 in February, down from 52.7 in January, reflecting concerns over Trump's tariff plans and indicating a weaker expansion in overall business activity across the private sector. This backdrop of economic uncertainty supports gold's status as a preferred investment during turbulent times.
A strong Dollar typically exerts downward pressure on gold prices, while a weaker Dollar tends to drive them upwards. The recent emergence of fresh USD selling has created a favorable environment for gold's rise. Nevertheless, expectations that the Fed will keep interest rates higher for longer due to persistent inflation could limit further upside potential for gold prices.
Gold's allure as a store of value remains strong amid prevailing economic uncertainties. Central banks continue to buy gold as part of their strategy to diversify reserves, signaling confidence in the metal's enduring value. As geopolitical risks and inflationary pressures persist, gold is likely to retain its status as a sought-after asset.