- Gold consolidates just below new all-time highs on Thursday.
- Falling interest rates globally, intensifying geopolitical conflicts and heightened Fed easing bets are the main factors.
- XAU/USD is overbought but rallying and in an uptrend on all timeframes.
Gold (XAU/USD) trades marginally higher in the $2.660s per troy ounce on Thursday amid falling global interest rates, an escalation of the conflict in the Middle East, and a weaker US Dollar (USD) due to increased odds of the US Federal Reserve (Fed) continuing with its aggressive monetary easing strategy.
Gold trades close to record highs
Gold trades just below its record high of $2,670 recorded on Wednesday. The decisions by the People’s Bank of China (PBoC), Swedish Riksbank and Central Bank of Czech Republic to slash interest rates over recent days is advantageous for Gold as it lowers the opportunity cost of holding the non-interest-paying asset, making it more attractive to investors.
A further upside factor is the escalation of the conflict between Israel and Hezbollah. On Wednesday, amid continued missile exchanges between the two enemies, the head of the Israeli Defence Forces, Herzi Halevi, told his troops in northern Israel that they should prepare for a ground offensive on Lebanon. If such an invasion should take place, it will further ratchet up risk aversion and increase safe-haven flows into the yellow metal.
Gold rallies on rising expectations of a 50 bps cut from the Federal Reserve
Although higher-than-expected US New Home Sales data for August and robust Mortgage Applications on Wednesday did not add any evidence that the US economy is heading for a hard landing, markets continue to price in another stimulatory 50 basis point (bps) (0.50%) interest rate cut from the Federal Reserve (Fed) at its November meeting. Labor market data may be more important in this regard, and Jobless Claims data out on Thursday could impact both USD and Gold.
Market-based probabilities of a jumbo 50 bps cut, according to the CME FedWatch tool, remain above 60%, which is higher than the alternative – a modest 25 bps reduction. This keeps pressure on the US Dollar and adds a further tailwind to Gold, which is mainly priced and traded in USD.
Data on Tuesday confirmed investors’ worst fears after the Conference Board Consumer Confidence Index fell to 98.7 in September from an upwardly revised 105.6 in August. The result was well below consensus estimates. Labor market concerns voiced by survey respondents were a major factor.
Gold may also be holding its highs after Fed Governor Adriana Kugler (voting member) delivered a relatively dovish speech on Wednesday. Kugler’s comments scored a 3.2 on FXStreet’s FedTracker, which gauges the tone of Fed officials’ speeches on a dovish-to-hawkish scale from 0 to 10, using a custom AI model.
Fed Chairman Jerome Powell is scheduled to speak on Thursday and could impact market expectations regarding Fed policy with implications for Gold price.
Technical Analysis: Gold consolidates just below all-time-highs
Gold consolidates just below its record high of $2,670 on Thursday. Overall, it is in an uptrend on a short, medium and long-term basis. Since it is a foundational principle of technical analysis that “the trend is your friend,” the odds favor even more upside for the yellow metal.
XAU/USD Daily Chart
Yet Gold is also now overbought, according to the Relative Strength Index (RSI) momentum indicator, and this increases the chances of a pullback. It also advises traders not to add to their long positions. If Gold exits overbought, it will be a sign to close long positions and sell shorts, as it would suggest a correction is in the process of unfolding.
That said, RSI can remain overbought for fairly long periods of time in a strongly trending market, and if Gold breaks above its record high it will confirm the establishment of a higher high and the extension of the uptrend. The next targets to the upside are the round numbers $2,700 and then $2,750.
If a correction evolves, firm support lies at $2,600 (September 18 high), $2,550 and $2,544 (0.382 Fibonacci retracement of the September rally).
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
