Gold prices are retracing from their high yesterday as traders react to the latest developments in terms of geopolitical tensions and the data that came out of the US. The question that stands in front of them is where the price will go from here, as both factors—geopolitical tensions and US economic data—are highly important.
Background
Yesterday, when Iran attacked Israil, we saw the price of the safe haven asset soaring, which is very much a typical trade for many investors. This is because when geopolitical tensions escalate, traders typically sell first and ask questions later. Simultaneously, they seek safety, and there's no better place for them to invest their hard-earned money and generate profits than the yellow metal. Having said this, the dollar index, which has a very close correlation with the yellow metal’s price, also soared on the back of the geopolitical tensions, as currency traders most of the time would prefer the green back when there is blood on the street.
Price Action
The spot gold price is trading lower today (and we will go into the details of why it is trading lower later on), after soaring over 1 percent yesterday on the back of Iran's attacks on Israeli soil. As of today, the price has primarily been in negative territory, yet it remains significantly above the low of yesterday, as illustrated in the chart below.
Gold chart by XTB
Today’s price action is very much with the highs and lows of yesterday, which shows that traders are not sure which direction they should take, and this is because of geopolitical tensions—not many know which direction it is going to go—and the second thing is US labour data.
Why does the price have no clear direction?
First, we had the US ADP data, which is crucial for many traders as it sets the tone for the most important economic numbers, the US NFP, which is expected on Friday. The Fed has made it very clear that they will adjust their monetary policy depending on the health of the US economy—more importantly, the US labor market. The reading for today's number exceeded expectations, sparking discussions about the possibility of a better number on Friday. This news is unfavorable for gold traders, as they had been anticipating a weakening in the US labor market, which they believed would lead to further desperation on the part of the Fed, potentially resulting in another rate cut of 50 basis points. However, based on today's data, this scenario appears improbable, leading to a strengthening of the dollar index and a negative impact on the gold price.
The other factor that traders need to pay attention to is the potential attack from Israil on Iran. If the attack is more of a tit-for-tat reaction, we may not see much of an escalation of tensions, as Iran, like the last time, would only delay its response. So that would call for a situation where we may see further steam coming out of the gold price.