Gold Price Analysis: XAU/USD Stalls Below $4,160 as CPI Concerns and Fed Policy Weigh on Outlook

Gold (XAU/USD) is currently trading at around $4,138, having bounced off the $4,075 area.

Gold (XAU/USD) is currently trading at around $4,138, having bounced off the $4,075 area. The bounce has since stalled at the resistance levels of $4,159 to $4,161. From a fundamental perspective, gold has recovered as Treasury yields and the dollar retreated after the hotter September CPI renewed fears of the Federal Reserve’s hawkish stance. Meanwhile, record ETF holdings and geo-political risks provide structural bullishness.

My near-term outlook is neutral-to-bearish with gold holding below the $4,160 to $4,161 area. A clear break over the $4,160 to $4,161 resistance area will open the upside potential towards the $4,216 area. On the other hand, a break below the $4,117 support area will reinforce the near-term bearish bias and target the $4,075 and $4,041 areas.

Hot CPI Keeps the Fed Risk Alive

In September, inflation took an unexpected turn for the worst, causing immediate discomfort to the Federal Reserve. Headline CPI climbed 0.6% month over month and 3.7% year over year. Core inflation climbed 0.3% month over month and 2.6% year over year. Rising gas prices and higher shelter and other services costs confirmed a broader inflation.

Inflation data initially strengthened the case for another rate hike in the near term, and brought a sudden selling in the gold market. The reaction is logical as rising inflation gives the Fed less flexibility to ease financial conditions and increases pressure to raise policy rates. All this brings strength to the dollar and higher yields.

October Hike Odds Cool Despite Inflation Surprise

The immediate policy reaction has become more balanced since Wednesday. As a result, markets pushed the probability of an October rate hike down to around 29% from about 47% following Wednesday’s CPI release. Various Fed officials pushed back on the idea of an automatic rate hike with hotter CPI to argue against a move at the October 27-28 meeting.

Several Fed officials have stated more tightening is likely, but the urgency to do so in October has subsided. Federal Reserve Bank of San Francisco President Mary Daly stated she believes further tightening will be necessary, but there is no rush to do so in October.

Falling Treasury Yields Bring Buyers Back

As the bond market improved on Thursday, it gave the biggest positive boost to the gold market. Yields on 10-year Treasuries retreated to 5.1% from Wednesday’s post CPI surge. Investors sought safety of government bonds during a global technology stock sell off.

Because bullion doesn’t pay interest, yields on government bonds and the dollar affect the price of gold. A decrease in yields and/or the dollar makes gold more attractive. So if yields continue to fall, an obstacle that prevented a stronger recovery in XAU/USD would be removed.

Tech Selloff Adds a Defensive Bid

Risk aversion is working in gold’s favor as well. Heavy selling in Asia sent the MSCI Asia-Pacific index excluding Japan lower, as did the Nikkei (down almost 5%) and the KOSPI.

Investor anxiety about risky, highly leveraged AI companies contributes to the urgency to secure safe-haven assets. That supports the recent gold rally and the defensive character of the current bid. It also allows gold to benefit from risk-off flows and perform as a safe-haven asset as yield on the 10-year Treasury continues to slide, removing some of the opportunity cost gold was faced with in October.

Fed Still Has an Inflation Problem

There is still the risk of larger monetary policy moves. The September CPI report was “discouraging” for Chicago Fed President Austan Goolsbee, especially services inflation, which can’t be explained by oil prices or tariffs.

The Fed’s latest Beige Book shows price pressures persist as the costs of freight, agriculture and airline industries rise due to higher fuel costs. While hiring is slowing, that doesn’t give the Fed a free pass to cut rates, in the view of policymakers. Citigroup has also switched to expecting a 25-basis point hike in December, keeping the December rate hike in the gold outlook.

ETF Demand Remains a Powerful Structural Support

Better foundation than short-term price action shows with institutional demand. In September, the world’s physically-backed gold ETFs rose by 67 tonnes, attracting about $10 billion in new inflows. Overall, holdings increased to a new all-time high of 4,256 tonnes.

The third quarter was a record-breaking quarter with inflows hitting $31 billion and holdings increasing by 211 tonnes. It is notable that inflows were observed even with a 53 bps increase in the U.S. 10 Year Treasury yield and a 2% increase in the U.S. Dollar index in September. It suggests that investors view gold as a portfolio strategy rather than an investment bet on falling rates.

Middle East Risk Keeps Safe-Haven Demand Relevant

Given the recent geopolitical situation, it is no surprise that gold has remained in high demand. As the supply of energy in the Middle East remains under threat, defensive assets remain in high demand. This coupled with inflation continues to provide a floor for gold prices.

Inflation in theory can benefit gold and other safe havens. However, geopolitical events can potentially hamper gold prices if they worsen the energy situation and push up oil prices. In this regard, even though geopolitical events support gold prices and other safe havens, in theory, they could bring more tightening from the Fed, which should work against gold prices. So, in general, gold should continue benefitting from geopolitical events that create turmoil in the markets, and especially if they threaten oil supplies.

Gold Technical Analysis: $4,160 Is the First Recovery Barrier

Currently, gold is trading at $4,138.27 on the 2-hour chart, after rocketing up from the $4,075 area. What’s worth noting is the recovery stalled at the $4,159 to $4,161 region, which is made up of a broken rising trendline and moving-average resistance.

The first major support I’ll be watching is $4,117.05. If that gets broken, the next major support zone would be in the $4,075.13 to $4,040.97 region. A breakout above $4,159.40 to $4,160.91 zone would shift the recovery structure in a positive light, and enhance the focus toward $4,216.47.

RSI is currently at 49, which suggests neutral momentum. With that said, RSI is above its signal line (39), and with momentum showing recovery, I’ll remain neutral, and more bearish, if gold is trading below the $4,160 to $4,161 region. A break above would put $4,216 in focus. Conversely, a break below $4,117 would put the $4,075 region in focus.

Resistance: $4,160, $4,216

Support: $4,117, $4,075, $4,041

Frequently Asked Questions

Why is gold recovering after hot CPI?

Gold is benefiting from falling yields, a weaker USD and risk-off demand. While continued inflation pressures can weigh on gold through higher rate expectations, these factors are temporarily offsetting that pressure.

Is another Fed hike still likely?

December remains a key hiking risk. Steady inflation and employment may force the Fed’s hand for a last-minute hike.

What is the key XAU/USD breakout level?

Resistance is located at $4159-4161. A break above that area would open the way to $4216.

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