- Gold prices attracted bargain-hunting, reversing some of the previous night's correction.
- Expectations of a 50bps Fed rate cut are capping attempts by the USD to recover and providing support.
- Bulls appear hesitant to make aggressive bets in the face of major central bank event risks.
Gold prices (XAU/USD) closed lower for the first time in the past four days on Tuesday, pulling back slightly from record highs near $2,589-2,590 hit the previous day. The decline was driven by profit taking but was not followed through as traders opted to wait and see before making new directional bets ahead of the risks of major central bank events this week. The US Federal Reserve (Fed) will announce its decision at the end of its two-day meeting this week later on Wednesday, followed by the Bank of England (BoE) meeting on Thursday and the Bank of Japan (BoJ) policy update on Friday.
Meanwhile, widespread pricing in a significant rate cut by the Fed will not help the US Dollar (USD) capitalize on its overnight rebound from its lowest since July 2023 and revive demand for non-yielding gold prices. However, a 25 basis points (bps) rate cut could bode well for the USD and weigh on the commodity. That said, the risk of further escalation of conflict in the Middle East and political uncertainty in the US ahead of the November presidential elections could support the precious metal and limit any declines. This suggests that, conversely, corrective pullbacks could still be viewed as buying opportunities.
Daily Digest Market Movers: Gold prices continue to find support from multiple factors ahead of Fed announcement
- Expectations of more aggressive monetary easing from the Federal Reserve could help gold prices attract bargain-hunting buyers on Wednesday, arresting a modest overnight decline from near record highs.
- According to CME Group's FedWatch tool, the market is currently pricing in a 65% chance that the U.S. central bank will cut borrowing costs by 50 basis points at the end of a two-day meeting later today.
- US 10-year Treasury yields recovered from 16-month lows following the release of US retail sales data on Tuesday, but follow-through has been lacking, limiting the US dollar's recovery.
- The U.S. Census Bureau reported that U.S. retail sales rose 0.1% in August compared with an expected decline of 0.2%, but sales excluding autos rose 0.1%, below consensus expectations.
- The upbeat data prompted intraday short covering activity in the US Dollar, lifting it from its lowest level since July 2023, but the positive movement lost momentum due to a dovish outlook for the Fed.
- At least nine people were killed in a coordinated explosion of pagers used by members of Lebanon's Hezbollah, raising the risk of an escalating Middle East war and sending the price of safe-haven gold plummeting.
- Meanwhile, North Korea test-fired multiple ballistic missiles into the sea east of South Korea and Japan on Wednesday, just days after giving visitors a tour of a facility to enrich uranium for a nuclear bomb.
- Market attention remains glued to the FOMC’s key policy decision which, together with the latest economic forecasts including the so-called “dot plot”, should give fresh impetus to XAU/USD.
Technical outlook: Gold prices are likely to move higher and may test the ascending channel resistance near $2,610.
From a technical perspective, bulls may wait for a move above the $2,589-2,590 area or above the all-time high recorded on Monday before making any new bets. A subsequent upswing could take gold prices above the $2,600 level and test the upper limit of the short-term ascending channel extending from the sub-$2,400 levels recorded in late June. This barrier is currently anchored around the $2,609-2,610 area and a decisive breach above this would confirm a new breakout and set the stage for an extension of the recently established uptrend.
Conversely, some follow-through selling below the overnight swing low near $2,561-$2,560 could lead to a further decline towards the strong horizontal resistance breakpoint of $2,530-$2,525. Any further decline would likely attract new buyers and be capped near the psychological level of $2,500. The latter should be a key turning point, below which a decisive break could drag gold prices down to the $2,475-$2,470 confluence comprised of the 50-day simple moving average and the lower boundary of the aforementioned trend channel.
Gold FAQ
Gold has played a vital role throughout human history, as it has been widely used as a store of value and a medium of exchange. Today, apart from its luster and use in jewellery, the precious metal is widely recognised as a safe haven asset and considered a good investment during volatile times. Gold is also widely seen as a hedge against inflation and currency depreciation, as it is not tied to any particular issuer or government.
Central banks are the largest holders of gold. To support their currencies in times of uncertainty, central banks tend to buy gold to diversify their reserves and to impress upon them the strength of their economies and currencies. Large gold reserves can be a source of confidence in a country's solvency. According to data from the World Gold Council, central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, the highest annual purchase since records began. Central banks in emerging countries such as China, India and Turkey are rapidly increasing their gold reserves.
Gold is inversely correlated with the US Dollar and US Treasury Bonds, which are the primary reserve and safe haven assets. When the US Dollar falls, gold tends to rise, allowing investors and central banks to diversify their assets during volatile times. Gold is also inversely correlated with risk assets. Rising stock markets tend to drive gold prices down, while sell-offs in risky markets tend to favor the precious metal.
Gold prices fluctuate due to a variety of factors. Geopolitical instability or fears of a deep recession can send gold prices soaring due to gold's status as a safe haven. As a non-yielding asset, gold tends to rise in value the lower interest rates are, but rising cost of funds typically weighs on gold. Still, since the asset is priced in dollars (XAU/USD), most of the movement is determined by the movement of the US Dollar (USD). A strong dollar tends to suppress gold prices, while a weak dollar can boost gold prices.
