- Gold prices are supported by dovish Fed expectations and geopolitical tensions.
- The upbeat mood in the market does little to diminish the strong underlying bullish mood.
- Traders are awaiting speeches from Fed officials and U.S. PCE data for any new stimulus.
Gold prices (XAU/USD) rose to around $2,664-2,665 on Tuesday, hitting yet another record high amid rising expectations of more aggressive monetary easing from the Federal Reserve (Fed) and rising geopolitical tensions in the Middle East. Meanwhile, the US Dollar (USD) is languishing near last week's year-to-date lows due to the Fed's dovish outlook and disappointing US macroeconomic data on Tuesday. This has largely obscured recent optimism due to China's new stimulus package, providing a boost for low-yielding gold.
However, bulls took a breather in the Asian session on Wednesday amid a slightly overbought situation on the daily chart. Moreover, with more Fed officials scheduled to speak this week, including Fed Chairman Jerome Powell on Thursday, investors seem reluctant to make aggressive bets. Also in focus this week is the release of the U.S. Personal Consumption Expenditures (PCE) price index on Friday, which could impact the outlook for Fed rate cuts and determine the next step in gold price direction.
Daily Digest Market Trends: Gold prices hover near record highs as hopes grow for another 50bps Fed rate cut
- According to CME Group's FedWatch tool, the market is currently pricing in a more than 75% chance that the Federal Reserve will cut interest rates by another 50 basis points in November.
- On top of this, weak US macro data on Tuesday weighed heavily on the US dollar, pushing it close to its lowest level since the start of the year, while non-yielding gold prices hit a new all-time high.
- The Conference Board's consumer confidence index worsened in September, falling to 98.7 from 105.6 in August, while its current mood index fell to 124.3 from 134.6.
- Manufacturing activity remains sluggish, with the Richmond Fed's composite manufacturing index falling to -21 in September from -19 in the previous month, the bank said.
- Israeli airstrikes in southern and eastern Lebanon on Monday, killing more than 500 people, raised the risk of a wider war in the Middle East, sending safe-haven XAU/USD further up.
- Recent optimism sparked by China's new stimulus package has done little to dent the strong bullish sentiment surrounding precious metals, but it continues to support a risk-on rally.
- Speeches by Fed officials this week, particularly that from Chairman Jerome Powell on Thursday, will be closely watched for hints as to the path of interest rate cuts, providing fresh impetus for commodities.
- Meanwhile, attention will remain glued to the US Personal Consumption Expenditures (PCE) price index due to be released on Friday, which will likely boost US dollar demand in the short term.
Technical Outlook: Gold prices need to stabilize before the next uptrend, as acceleration in the ascending channel continues
From a technical perspective, the breakout of the short-term ascending channel this week and the subsequent upside support the outlook for further upside. That said, the Relative Strength Index (RSI) on the daily chart is above 70, suggesting slightly overbought conditions. For this reason, it would be prudent to wait for a short-term consolidation or moderate pullback before placing any new bullish bets around gold prices.
On the other hand, a corrective decline will likely invite dip buying and find decent support near the resistance breakpoint of the ascending channel, near $2625. What will follow is a round figure of $2600 which, if broken decisively, could provoke technical selling and drag gold prices down to the $2575 region on the way to turning resistance into support at the $2560 area and the $2535-2530 area.
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, the leading 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 keep gold prices in check, while a weak dollar can boost gold prices.
