Gold prices edged lower in early Asian trade on Thursday, with XAU/USD slipping back toward the $4,400 per ounce mark. The precious metal had been displaying notable strength at elevated levels, but fresh geopolitical risks are prompting a market reassessment of energy prices and inflation outlooks, leading to some short-term profit-taking. However, the downside for gold is limited by evolving expectations for US monetary policy, as July's inflation data failed to reignite, thereby reducing pressure on the Federal Reserve to tighten policy further in September.
The gold market is currently navigating a unique fundamental landscape. On one hand, heightened tensions between the US and Iran, coupled with restrictions on shipping through the Strait of Hormuz, are increasing global energy supply risks. This could fuel a rise in crude oil prices, introducing new inflationary pressures. On the other hand, the US inflation data itself is showing signs of cooling, which has significantly diminished market bets on a near-term Fed rate hike. This means gold is being pulled in two directions: supported by geopolitical risk premiums but weighed down by the spectre of energy-driven inflation.
Data from the US Bureau of Labor Statistics showed that the US Consumer Price Index (CPI) rose 3.4% year-on-year in July, down from 3.5% in June. The core CPI, which excludes volatile food and energy prices, increased 2.5% year-on-year, below the previous reading of 2.6%. Both figures were in line with market expectations. An analysis of the data structure reveals that inflation did not show a broad-based acceleration; instead, it moderated across several goods and service categories. This has alleviated investor concerns that the Fed might need to adopt a more aggressive tightening stance quickly.
Changes in the interest rate market are directly impacting gold's pricing. According to market surveys, the implied probability of a Fed rate hike in September has fallen to around 40%, while the probability of an October hike has dropped from approximately 75% to roughly 60%. The market's full pricing for the next rate increase has been pushed further out, now closer to December. For a non-yielding asset like gold, a lower market interest rate expectation typically reduces the opportunity cost of holding it, thereby limiting the downside for prices. Following the release of the US inflation data, the interest rate pressure on the gold market has further subsided.
TD Securities believes the latest CPI report did not prompt a significant market re-pricing of higher Fed rate hike expectations, suggesting that the broader precious metals complex still has a solid foundation for upward movement. The market had already begun to reduce its bets on further US rate hikes, so gold's current price action reflects more of a repricing of the future policy path by investors, rather than a simple trade based on current inflation levels.
However, the situation in the Strait of Hormuz is becoming an increasingly important variable for gold's trajectory. Senior Iranian officials have indicated that significant differences remain between the US and Iran regarding how to achieve a longer-term ceasefire arrangement and revive a previous interim agreement. As a result, negotiations have not made substantial progress. If the transport corridor remains restricted, the risk of an oil supply disruption could rise further.
From gold's perspective, rising oil prices have a dual impact. Firstly, higher energy costs can heighten risk aversion in the market, driving capital flows into safe-haven assets like gold. Secondly, if oil prices continue to climb and create new inflationary pressures, it could force the Fed to maintain higher interest rates for a longer period, thereby increasing the cost of holding gold. In essence, a rise in oil prices does not automatically mean a corresponding rise in gold; the key factor is whether the market will focus more on the demand for safe-haven assets or on the risks of inflation and higher interest rates.
Seema Shah, Chief Global Strategist at Principal Asset Management, believes that with the Strait of Hormuz still effectively closed, the upside risk to inflation from energy prices will remain a key focus for the market for some time. This assessment explains why gold prices have corrected even as US inflation data appeared relatively benign: the market is concerned that rising energy costs will eventually influence Fed policy through inflation expectations.
At the same time, gold retains a strong asset allocation role. The current global economic policy environment is highly uncertain, with significant room for change in geopolitical risks, energy supply dynamics, and the policy paths of major central banks. In this environment, demand for gold as a non-sovereign safe-haven asset has not disappeared. Therefore, the current price adjustment is more akin to a high-level consolidation rather than a definitive trend reversal.
From a capital flow perspective, if US inflation continues to cool and the labour market further slows, Fed policy expectations could shift further towards easing. A decline in real interest rates would then reinforce gold's bullish case. Conversely, if oil prices rise persistently due to the Strait of Hormuz risk and cause US inflation to re-accelerate, the market could re-price higher rate hike expectations, potentially subjecting gold to more significant, albeit temporary, downward pressure.
Therefore, the market currently needs to track three key variables: US real interest rates, the US Dollar Index, and the energy risk premium from the Strait of Hormuz. US interest rate expectations determine the cost of holding gold, the dollar dictates gold's pricing pressure, and geopolitical risks define the strength of gold's safe-haven demand. When these three factors move in a clear, unified direction, gold prices tend to form a more distinct trend.
Looking at the daily chart, XAU/USD is still maintaining a clearly bullish trend. Prices are trading above the 100-day moving average, near $4,390, and the middle band of the Bollinger Bands, around $4,140. This suggests the medium-term bullish structure remains intact. The price has been consistently trending towards the upper Bollinger Band, which is currently around $4,410. Consequently, the $4,400-$4,410 zone has become a critical battleground in the short term. The 14-day Relative Strength Index (RSI) is around 67.5, approaching overbought territory. This indicates that upward momentum is still strong, but there is also some risk of a short-term technical correction. If the bulls can effectively break and hold above $4,410, it would suggest that the current high-level consolidation could expand to the upside, with the next targets being $4,450 and the psychological $4,500 level. If the price fails to break above $4,410 and subsequently falls below $4,390, short-term selling pressure would likely intensify. The first support level to watch would be around $4,350, followed by the middle Bollinger Band near $4,140. Only a sustained break below the middle band would truly threaten the current strong daily chart structure.
On the 4-hour chart, gold is showing signs of a high-level pullback after a rapid rally, with short-term momentum slowing compared to the previous period. The $4,400 level is both a psychological barrier and a significant technical zone near the current price. If gold can find support in the $4,390-$4,400 area and then break above $4,410, the bulls could regain the initiative and push towards the $4,450 level. However, if the 4-hour chart shows a decisive break below $4,390, it could signal a more pronounced correction phase, potentially targeting support at $4,350 or even $4,300.
Key Takeaways
The core narrative for gold is currently a tug-of-war between easing monetary policy pressures and rising energy inflation risks. The cooling of US CPI in July has lowered expectations for a Fed rate hike in September, significantly relieving interest rate pressure on gold. However, the ongoing restrictions in the Strait of Hormuz are increasing the risk of higher oil prices and a resurgence of inflation, which caps the upside potential for gold in the short term.
In the near term, $4,390 is a crucial technical support level that bulls need to defend, while $4,410 is the key resistance level that needs to be broken to open up further upside. If subsequent US inflation and employment data continue to cool, gold could challenge the $4,450 and $4,500 levels. On the other hand, if energy prices continue to rise and fuel a re-acceleration of US inflation expectations, the price of gold might first undergo a deeper technical correction.
Over the medium term, gold still possesses strong structural support, but the pace of its rally may shift from a rapid advance to a higher-level consolidation. The definitive factor for the next major trend will be whether Fed policy expectations continue to ease, and whether the safe-haven demand generated by geopolitical risks can offset the potential upward pressure on real interest rates from energy-driven inflation. Until these two variables become clearer, the probability remains high that gold will trade in a strong, range-bound pattern at elevated levels.
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