- Gold prices hit a new all-time high on Tuesday amid a Fed-inspired dovish sell-off in the U.S. dollar.
- Geopolitical tensions also contributed to capital flows towards the safe haven XAU/USD.
- Bulls are taking a break and waiting for further clues on the Fed’s rate cut path before placing new bets.
Gold prices (XAU/USD) rose to a new record high in the $2,531-2,532 range on Tuesday as acceptance grows that the Federal Reserve (Fed) will soon begin its monetary easing cycle. Markets are currently pricing in a higher probability of a 25 basis point (bp) rate cut in September, which in turn boosted demand for the yield-free yellow metal. Meanwhile, dovish Fed expectations continue to weigh on U.S. Treasury yields and the U.S. dollar (USD). In fact, the USD Index (DXY), which tracks the greenback against a basket of currencies, fell to a new seven-month low, further supporting the commodity.
Apart from that, the slight decline in US equity markets overnight proved to be another factor that benefited the safe-haven gold price. However, recent optimism that tensions in the Middle East were easing limited further gains in the XAU/USD pair. Bulls also seemed cautious, preferring to wait for Fed Chair Jerome Powell’s appearance at the Jackson Hole Symposium on Friday. This, along with the July FOMC meeting minutes, will be used as an indication of the Fed’s policy stance, which in turn will play a key role in short-term USD demand and provide a significant boost to the metal.
Daily overview of market drivers: Gold price continues to be supported by Fed rate cut bets, declining USD and geopolitical risks
- Speculation that the US Federal Reserve would soon begin a cycle of interest rate cuts in September put pressure on US Treasury yields and the US dollar, which in turn pushed the price of gold to a new record high on Tuesday.
- According to CME Group’s FedWatch tool, markets are currently pricing in a probability of just over 70% that the US Federal Reserve will cut borrowing costs by 25 basis points at the September FOMC monetary policy meeting.
- In addition, a Reuters poll found that a narrow majority of economists expect the Fed to cut interest rates by 25 basis points at each of its remaining three meetings in 2024. That would be one more rate cut than predicted last month.
- Fed Governor Michelle Bowman sought to dampen expectations of a near-term rate cut, saying that despite recent progress, price growth levels remain significantly elevated and still uncomfortably above the central bank’s 2 percent target.
- Last week, the People’s Bank of China (PBOC) granted new gold import quotas to several Chinese banks in anticipation of a revival in demand, suggesting that another Chinese gold buying spree could be on the horizon.
- In addition, holdings of the SPDR Gold Trust, the world’s largest exchange-traded gold fund, rose to their highest level in seven months on Monday, reaching 859 tonnes, indicating rising demand for financial investments.
- Meanwhile, geopolitical concerns, particularly in the Middle East and a possible ceasefire between Israel and Hamas, are keeping investors on their toes and proving to be another factor supporting the safe-haven XAU/USD pair.
- However, traders will be cautious ahead of the release of the minutes of the July FOMC meeting later this Wednesday and Fed Chair Jerome Powell’s speech on Friday, which are expected to provide clues about future policy stance.
Technical Analysis: Gold price bulls remain in control, last week’s breakout of $2,480 remains in play
From a technical perspective, last Friday’s breakout of the triple resistance in the $2,479-2,480 range and the subsequent strength above the psychological mark of $2,500 was seen as a new trigger for bullish traders. Moreover, the oscillators on the daily chart are comfortably holding in the positive territory and are still far from the overbought zone. This, in turn, suggests that the path of least resistance for gold prices is to the upside.
Therefore, any meaningful decline could still be seen as a buying opportunity near the $2,500 round mark, which should support the downtrend in gold prices near the $2,480 resistance level. However, some follow-through selling could pull XAU/USD towards the $2,455-2,453 horizontal support en route to the $2,430 region. A convincing break below the latter mark could pull the metal to the 50-day SMA, which is currently just below the $2,400 level.
Frequently asked questions about gold
Gold has played a key role in human history as it has been widely used as a store of value and a medium of exchange. Aside from its shine and use as a piece of jewelry, the precious metal is currently widely viewed as a safe haven asset, meaning it is considered a good investment during turbulent times. Gold is also widely viewed as a hedge against inflation and currency devaluation as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. In their efforts to support their currencies during turbulent times, central banks tend to diversify their reserves and buy gold to improve the perceived strength of the economy and currency. High gold reserves can be a source of confidence in a country’s ability to pay. According to the World Gold Council, in 2022 central banks added 1,136 tonnes of gold worth around $70 billion to their reserves. This is the highest annual purchase on record. Central banks from emerging markets such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the U.S. dollar and U.S. Treasuries, both of which are important reserves and safe haven assets. When the dollar depreciates, the price of gold tends to rise, allowing investors and central banks to diversify their investments during turbulent times. Gold also has an inverse correlation with risky assets. A rally in the stock market tends to weaken the price of gold, while sell-offs in riskier markets tend to favor the precious metal.
The price can change based on a variety of factors. Geopolitical instability or fear of a severe recession can quickly drive up the price of gold due to its safe-haven status. As a non-yielding asset, gold tends to rise when interest rates are lower, while higher money costs usually weigh on the yellow metal. However, most of the moves depend on how the US dollar (USD) behaves, as the asset is priced in dollars (XAU/USD). A strong dollar tends to keep gold prices in check, while a weaker dollar is likely to drive gold prices higher.
