The XAU/USD pair, which represents the value of gold against the US dollar, is facing vulnerability after recent remarks made by the Federal Reserve Chair, Jerome Powell. Powell’s comments have sparked concerns among investors, leading to a drop in the price of gold.
During a press conference, Powell hinted at the possibility of inflationary pressures on the US economy. He acknowledged that inflation could temporarily spike as a result of the economic recovery from the pandemic, but reassured that it would be transitory. However, his comments raised doubts among investors, as they interpret this as a signal that the Federal Reserve might begin to tighten monetary policy sooner than expected.
Gold is often seen as a safe-haven asset during times of economic uncertainty. Investors typically flock to gold to hedge against inflation and preserve their wealth. However, if the Federal Reserve starts to tighten its monetary policy by raising interest rates or tapering its bond-buying program, it could dampen the appeal of gold.
When interest rates rise, the opportunity cost of holding non-yielding assets like gold increases. Investors may choose to sell their gold holdings and seek higher returns in interest-bearing assets. Additionally, a stronger US dollar resulting from higher interest rates can also put downward pressure on the price of gold as it becomes more expensive for foreign buyers.
Furthermore, if the Federal Reserve starts to taper its bond-buying program, it would reduce the liquidity in the market, potentially leading to a decrease in demand for gold. The central bank’s quantitative easing measures have supported asset prices and kept interest rates low, which has benefited gold in recent years. However, any reduction in these measures could weigh on the price of the precious metal.
After Powell’s remarks, the price of gold experienced a significant drop. It fell below the key psychological level of $1,800 per ounce and confirmed a bearish trend. This suggests that investors are cautious about the future direction of gold and are adjusting their positions accordingly.
In addition to Powell’s comments, other factors contributing to the vulnerability of the XAU/USD pair include the progress of the global vaccination campaigns and the overall economic recovery. As more countries vaccinate their populations and economies reopen, risk appetite could increase, shifting investors’ focus away from gold.
Overall, the XAU/USD pair seems to be facing vulnerability in the near term after Powell’s remarks. Investors will closely monitor any further developments from the Federal Reserve and economic indicators to assess the future direction of gold.