- Gold prices traded in positive territory in the early morning European session on Monday.
- Federal Reserve interest rate cuts and geopolitical risks in the Middle East continue to support precious metals.
- Renewed demand for the US Dollar may limit the upside of XAU/USD.
Gold prices (XAU/USD) hit a record high on Monday, supported by a weak dollar. The start of the Federal Reserve's monetary easing cycle and the prospect of more interest rate cuts this year could support non-interest bearing gold prices. Additionally, rising geopolitical tensions in the Middle East could lead to new allocations to safe haven assets such as gold.
Traders will now focus on the release of preliminary US Purchasing Managers' Index (PMI) data later on Monday, but a better-than-expected reading could boost the US dollar and weigh on gold prices in US dollars.
Daily Digest Market Trends: Gold prices remain firm amid global factors
- “The US dollar remains broadly firm against a basket of major currencies and rising bond yields create an unfavourable environment for gold, which could see forced liquidation of short positions propelling gold prices to all-time highs,” analysts at FxPro said.
- Hezbollah and Israel exchanged heavy artillery fire on Sunday, with Lebanese militant group Hezbollah firing missiles deep into Israeli northern territory following the heaviest artillery barrage in the nearly year-long conflict, according to CNN.
- Philadelphia Federal Reserve Bank President Patrick Harker said on Friday that the U.S. central bank has done a good job navigating a tough economy in recent years. He added that both “hard” and “soft” data are important in making decisions.
- Federal Reserve Governor Michelle Bowman said on Friday that a readjustment of the federal funds rate would be appropriate, but that small steps would be preferable to start with because inflation is not yet at its target.
- Federal Reserve Governor Christopher Waller said on Friday that the decision to cut interest rates quickly by 50 basis points was the right one, but the central bank may pause the cuts depending on more data.
Technical reasons why: Gold prices sustain above $2,600 amid overbought RSI
Gold prices are trading modestly higher on the day. The precious metal is maintaining a strong bullish trend on the daily chart as prices are finding solid support above the key 100-day exponential moving average (EMA). However, the 14-day relative strength index (RSI) is trading above its mid-line near 70.50, suggesting that the RSI is in overbought conditions. This suggests that further consolidation cannot be ruled out before setting up a near-term gold price rally.
Gold is approaching a key resistance area near the all-time high of $2,625, and a decisive move above this level could pave the way for a psychological level of $2,700.
Meanwhile, the first downside objective is a fraction of $2,600. A break above this level could trigger a drop towards the resistance-turned-support at $2,560. The next contested level is the September 6 low at $2,485.
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.
