Gold rises 0.3% to $4,022 as physical demand underpins prices

Gold's recent price volatility has tracked the S&P 500 more closely than its traditional safe-haven role would suggest, Capital Economics says.

Gold edged up 0.3% to $4,022.19 a troy ounce as physical demand from China and central bank buying provided a floor beneath the metal.

"Gold has arguably behaved more like a risky asset than a safe one lately, as its recent price volatility has been comparable with that of the S&P 500," Thomas Mathews, a strategist at Capital Economics, said in a note.

The metal's underperformance during the Middle East conflict also appears to undermine its inflation-hedge status, Mathews said. However, gold's link with real bond yields remains intact, and any fall in real yields would give the metal a boost. He does not expect gold's recent positive correlation with equities to last if the economy weakens and the Federal Reserve cuts policy rates aggressively.

Physical demand, particularly in China, and central bank buying are underpinning the gold market, ANZ Research analysts said in a note. While bullion faces near-term headwinds from Fed tightening expectations and a firm dollar, investment positioning looks lean after months of exchange-traded fund outflows, which suggests further declines could be limited.

Four consecutive weekly losses

Gold has been under pressure in recent weeks, with spot prices falling for four straight weeks through July 18. The metal settled at $4,088.38 an ounce last week, down $67.02 or 1.61%, according to exchange data. The 52-week moving average sits at $4,255.51, a level that has acted as overhead resistance during the current selloff.

The retracement zone between $4,069.54 and $3,707.82 represents a long-term value area where passive investors could build positions, according to technical analysis. Last week's low of $3,959.08 marked the first test of that zone, and the market bounced.

Central banks have been buying gold for years to diversify reserves away from the dollar as trade tensions escalated, according to the World Gold Council's most recent Central Bank Gold Reserves survey. That buying is large in scale, consistent, and not driven by short-term rate expectations, providing structural support underneath the market.

Payrolls data as next catalyst

The next catalyst for gold comes Thursday with the June nonfarm payrolls report, which will land in a holiday-shortened session with thinning liquidity. A strong number would keep the higher-for-longer rate argument intact, while a weak reading would give gold bulls their first real opening to argue that the tightening cycle is running out of economic support.

This article is for informational purposes only and does not constitute investment advice.