Gold bulls not ready to give up yet amid Fed rate cut bets and geopolitical risks
- Gold attracts dip-buyers during the Asian session amid a supportive fundamental backdrop.
- Rising Fed rate cut bets keep the USD depressed and continue to benefit the precious metal.
- Geopolitical risks further benefit the safe-haven commodity ahead of key central bank events.
Gold (XAU/USD) kicks off the new week on a softer note, though it manages to reverse an Asian session dip to the $3,627-3,626 area and currently trades near the top end of a one-week-old trading range. Traders now seem reluctant and opt to move to the sidelines ahead of this week's key central bank event risks before positioning for the next leg of a directional move. The focus will be on the crucial FOMC rate decision, which will play a key role in influencing the US Dollar (USD) price dynamics and provide some meaningful impetus to the non-yielding yellow metal.
In the meantime, rising bets for a more aggressive policy easing by the US central bank keep the USD depressed near its lowest level since July 24 and continue to act as a tailwind for the Gold price. Apart from this, rising geopolitical risks further support the safe-haven precious metal. However, a generally positive risk tone keeps the XAU/USD pair below the record high, around the $3,675 region, touched last week. Nevertheless, the fundamental backdrop seems tilted in favor of bulls and suggests that any corrective slide might continue to attract dip-buyers.
Daily Digest Market Movers: Gold continues to draw support from dovish Fed expectations
- Traders ramped up their bets for three interest rate cuts by the Federal Reserve this year after the recent US macro data pointed to a softening labor market. According to the CME Group’s FedWatch Tool, traders see a 100% chance that the US central bank will lower borrowing costs for the first time in nine months at the end of a two-day meeting on Wednesday.
- Moreover, the Fed is expected to deliver two more rate cuts, in October and in December, which keeps the US Treasury bond yields depressed and the US Dollar close to its lowest level since July 24. This, in turn, assists the non-yielding Gold to attract some dip-buyers at the start of a new week and reverse a modest Asian session dip to the $3,627-3,626 region.
- Ukraine launched a large attack on Russian energy facilities on Sunday amid intensifying drone strikes from both sides. The US has stepped up pressure on NATO countries to tighten energy sanctions on Russia and impose tariffs on countries buying Russian oil in a bid to curtail its revenues and end the deadliest conflict in Europe since World War II.
- Meanwhile, an Iranian lawmaker, Mojtaba Zarei, has called on Qatar to expel US forces and host Iranian Revolutionary Guard hypersonic missiles to counter Israeli threats. This keeps geopolitical risks in play ahead of an Arab-Islamic leaders' summit in Doha and turns out to be another factor that continues to offer some support to the safe-haven precious metal.
- The XAU/USD bulls, however, seem reluctant to place aggressive bets and might opt to wait for this week's key central bank event risks. The Bank of Canada and the US Fed will announce their rate decisions on Wednesday, followed by the Bank of England policy update on Thursday and the outcome of a two-day Bank of Japan policy meeting on Friday.
- Meanwhile, investors will look for more cues about the Fed's rate-cut path, which will drive the USD demand in the near-term and provide a fresh directional impetus to the commodity. Hence, the focus will be on Fed Chair Jerome Powell's comments at the post-meeting press conference and updated economic projections, which include the so-called dot plot.
Gold needs to consolidate before the next leg up amid still overbought RSI on the daily chart
From a technical perspective, the daily Relative Strength Index (RSI) remains in overbought territory and backs the case for an extension of the range-bound price action before the next leg up. That said, momentum beyond the $3,657-3,658 immediate hurdle should allow the Gold price to retest the all-time peak, around the $3,675 zone touched last Tuesday and climb further towards conquering the $3,700 round-figure mark.
On the flip side, the Asian session low, around the $3,627-3,626 zone, could offer immediate support ahead of the $3,610-3,600 region. Some follow-through selling below last week's swing low, around the $3,580 region, could make the Gold price vulnerable to extend the corrective slide towards the $3,565-3,560 intermediate support en route to the $3,500 psychological mark.
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.