Copy of Gold Prices Hold Gains Amid Safe-Haven Demand and Weak US Dollar

Gold prices have edged higher as safe-haven demand continues to support the precious metal ahead of key economic data from the United States. On Friday, gold was trading near $2,660 per ounce, benefiting from geopolitical tensions and subdued bond yields. The upward movement comes ahead of the release of the US ISM Manufacturing Purchasing Managers’ Index (PMI) data for December, expected to show a steady contraction in manufacturing activity at a reading of 48.4. This potential slowdown in US manufacturing could further influence gold's performance.

The yellow metal's strong performance this year, with a 27% increase in 2024, marks its best annual return since 2010. This rally has been driven largely by persistent geopolitical uncertainties, including the ongoing conflict between Russia and Ukraine and escalating tensions in the Middle East, particularly concerning Iran. Reports from Axios indicate that US President Joe Biden has discussed contingency plans to strike Iran’s nuclear facilities, heightening concerns over Iran’s nuclear ambitions. These tensions continue to drive demand for gold as a safe-haven asset.

US Dollar Weakness and Impact on Gold

While gold has benefitted from safe-haven flows, the strength of the US Dollar has somewhat capped its gains. The US Dollar Index (DXY), which tracks the performance of the US Dollar against six major currencies, recently reached a multi-year high of 109.56 before slightly easing to 109.20. A stronger dollar makes gold, priced in dollars, more expensive for buyers using other currencies, which can limit gold’s upside potential. However, the subdued yields on US Treasury bonds have helped mitigate some of this pressure. With the 2-year Treasury yield at 4.24% and the 10-year yield at 4.56%, lower bond yields reduce the opportunity cost of holding non-yielding gold, making it more attractive to investors.

Despite a stronger US Dollar, the Federal Reserve's cautious stance on rate cuts for 2025 could provide support for gold. The Fed has indicated a shift towards a tighter monetary policy, particularly with uncertainties surrounding the potential economic policies under the incoming Trump administration. The Fed’s cautious approach has contributed to subdued yields, which helps maintain gold’s appeal.

Geopolitical Risks and Central Bank Demand

In addition to the US Dollar’s performance, geopolitical tensions continue to play a significant role in gold’s price trajectory. In addition to concerns over Iran, the conflict between Russia and Ukraine remains a key factor driving safe-haven demand. Reports of drone strikes in Kyiv and airstrikes in Gaza have kept global markets on edge, with investors seeking refuge in gold.

At the same time, central banks around the world have been increasing their gold purchases. A World Gold Council survey indicates that central banks are likely to continue boosting their gold reserves in 2025, further supporting demand for the precious metal. The People's Bank of China (PBoC) has signaled its intent to cut interest rates, which could lead to a potential recovery in China’s economy and an increase in gold demand. Chinese officials, including President Xi Jinping, have committed to prioritizing economic growth in 2025, which could contribute to stronger gold demand.

Gold’s Technical Outlook

Gold’s technical outlook remains positive, with the metal holding above the nine- and 14-day Exponential Moving Averages (EMAs), suggesting a bullish bias in the short term. The 14-day Relative Strength Index (RSI) has also risen above 50, further supporting this positive momentum. If gold can break above psychological resistance at $2,700, it could target its December high of $2,726.34. On the downside, initial support lies around the $2,635 level, with further support at $2,583.

ISM Manufacturing PMI and Gold’s Outlook

Investors are focused on the upcoming US ISM Manufacturing PMI data, due to be released at 15:00 GMT. The PMI is expected to remain steady at 48.4, signaling continued contraction in the US manufacturing sector. A weaker-than-expected PMI reading could add to gold’s appeal as a safe-haven asset, especially if it signals a slowdown in the broader economy.

The PMI data is a critical indicator for traders, as it reflects the health of the manufacturing sector, which is closely tied to overall economic performance. A reading below 50 suggests a contraction in manufacturing activity, which is generally bearish for the US Dollar and could provide further support for gold.

Gold prices are likely to maintain their bullish momentum as geopolitical risks, subdued bond yields, and central bank purchases continue to support the precious metal. While the US Dollar’s strength and potential rate hikes by the Federal Reserve may limit gold’s upside, the overall demand for safe-haven assets and gold’s appeal as a store of value in uncertain times are likely to keep the price of gold elevated. Traders will closely monitor the ISM Manufacturing PMI data and any further geopolitical developments, which could influence the direction of gold in the coming days.