- Gold prices are taking a breather after soaring to a new all-time high on Monday.
- The fundamental backdrop is favorable for bullish trading and supports the prospects of further gains.
- Traders are now focusing on Friday's US PCE price index before determining direction.
Gold prices (XAU/USD) remain slightly overbought on the daily chart on Tuesday, consolidating for a second straight day as bulls turn cautious after hitting fresh all-time highs the previous day. Expectations of more aggressive monetary easing from the US Federal Reserve (Fed) have kept the decline moderated, limiting the US Dollar's (USD) recovery from its year-to-date highs reached in reaction to last week's massive interest rate cut.
Other than this, persistent geopolitical risks stemming from ongoing conflicts in the Middle East, political uncertainty in the US ahead of the November elections, and fears of an economic slowdown will support safe-haven gold prices. However, underlying bullish sentiment across global stock markets is keeping the safe-haven XAU/USD in check ahead of the release of the US Personal Consumption Expenditures (PCE) price index this Friday.
Daily Digest Market Trends: Gold prices remain supported by expectations of further Fed rate cuts and geopolitical risks
- Non-interest-bearing gold prices hit a record high on Monday on expectations that the Federal Reserve will cut borrowing costs by a further 125 basis points in 2024, following last week's big 50 basis point rate cut.
- According to CME Group's FedWatch tool, investors are now pricing in a further sharp rate cut at the November policy meeting, which would put an end to the US dollar's slow recovery from its year-to-date lows.
- Minneapolis Fed President Neel Kashkari said Monday that the balance of risks has shifted from higher inflation to further weakness in the labor market, justifying interest rate cuts.
- Additionally, Atlanta Fed President Raphael Bostic said recent data compellingly suggests the U.S. is on a sustainable path toward price stability and that risks to the labor market are increasing.
- Chicago Fed President Austin Goolsbee said labor market downturns usually happen quickly and it doesn't make sense to keep interest rates high if the goal is to maintain the status quo.
- On the data front, a survey compiled by S&P Global showed that eurozone business activity unexpectedly contracted sharply, while US business activity stabilised in September.
- Further details of the preliminary US PMI showed that the average price of goods and services rose at the fastest pace in six months, suggesting that inflation will accelerate in the coming months.
- This comes on top of the assumption that interest rate cuts implemented to stimulate the economy can sometimes lead to price increases, benefiting the commodity's status as a hedge against inflation.
- Israeli airstrikes on suspected Hezbollah weapons sites in southern and eastern Lebanon on Monday killed around 500 people and raised the risk of escalating conflict in the Middle East.
- This, combined with political uncertainty in the United States and a bleak outlook for the global economy, suggests that the path of least resistance for safe-haven precious metals remains to the upside.
- However, gains for XAU/USD were capped by an unexpected interest rate cut by the People’s Bank of China (PBOC) on Monday, along with the passage of a stopgap spending bill to fund the US government until December 20th.
- With the daily chart showing overbought conditions, traders may choose to wait and see ahead of Friday's release of the U.S. Personal Consumption Expenditures (PCE) price index.
Technical Outlook: Gold prices need to stabilize before advancing their recent uptrend
From a technical perspective, the recent breakout and acceptance of the $2,600 level can be seen as a fresh catalyst for bullish traders. That said, the Relative Strength Index (RSI) on the daily chart is above the 70 level, which calls for caution. Hence, it would be prudent to wait for a short-term consolidation or moderate pullback before taking a position for the next upside phase.
Meanwhile, a corrective decline is likely to attract new buyers near the $2,600 level, below which gold prices can fall to the horizontal zone at $2,560. The next relevant support is near the resistance breakpoint at $2,535-2,530, ahead of the psychological mark of $2,500. A credible break below the latter could change the short-term bias in favor of a bearish trade, leading to a larger downside.
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.
