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17.09.2024, 02:14

Gold price consolidates near all-time peak, looks to Fed before the next leg up

  • Gold price bulls turn cautious ahead of the crucial FOMC policy meeting starting this Tuesday.
  • The USD languishes near the YTD low amid bets for a 50 bps Fed rate cut and offers support.
  • China’s economic woes, the US political uncertainty and geopolitical risks also act as a tailwind.

Gold price (XAU/USD) is seen oscillating in a narrow trading band during the Asian session on Tuesday and consolidating its recent gains to a fresh all-time peak, around the $2,589-2,590 region touched the previous day. Traders now seem reluctant and opt to move to the sidelines ahead of the highly anticipated two-day Federal Open Market Committee (FOMC) meeting starting today. Heading into the key central bank event risk, the prospects for a more aggressive policy easing by the Federal Reserve (Fed) keep the US Dollar (USD) depressed near the 2024 low and continue to act as a tailwind for the non-yielding yellow metal. 

Meanwhile, disappointing Chinese macro data released over the weekend added to concerns about a slowdown in the world's second-largest economy. Apart from this, persistent geopolitical risks, which tend to benefit traditional safe-haven assets, turn out to be another factor lending support to the Gold price. The fundamental backdrop suggests that the path of least resistance for the XAU/USD is to the upside, though investors might prefer to wait for the crucial FOMC policy decision on Wednesday. Moreover, slightly overstretched conditions on the daily chart warrant some caution before placing fresh bullish bets.

Daily Digest Market Movers: Gold price remains supported by a dovish Fed, safe-haven flow

  • Rising bets for an oversized interest rate cut by the Federal Reserve drag the US Dollar to its lowest level since July 2023 and lift the non-yielding Gold price to a fresh record high on Monday. 
  • According to the CME Group's FedWatch Tool, the markets are currently pricing in over a 60% chance that the US central bank will lower borrowing costs by 50 basis points on Wednesday.
  • The yield on the rate-sensitive 2-year US government bond fell to the lowest since September 2022 and the benchmark 10-year US Treasury yield slipped to the weakest since June 2023.
  • The New York Empire State Manufacturing Index came in at 11.5 for September, much better than the -3.9 expected and the -4.7 previous, albeit did little to impress the USD bulls.
  • A string of downbeat Chinese data released over the weekend pointed to more economic weakness and challenges in reaching the official target of around 5% GDP growth rate in 2024.
  • Hamas issued a warning stating that hostages would be sent out in coffins if Israel continues its military strikes and didn't agree to a deal, raising the risk of a wider conflict in the Middle East. 
  • Adding to this, reports of a second attempted assassination attempt on Republican presidential candidate Donald Trump add to the nervousness and act as a tailwind for the XAU/USD. 
  • Bullish traders, however, take a brief pause and now await the outcome of a two-day FOMC monetary policy meeting before positioning for the next leg of a directional move. 
  • The Fed will announce its decision on Wednesday, which will be accompanied by new economic projections, including the so-called dot-plot, and followed by the post-meeting presser.
  • Investors will closely scrutinize Fed Chair Jerome Powell's comments for cues about the rate-cut path, which, in turn, will drive the USD demand and provide a fresh impetus to the commodity. 

Technical Outlook: Gold price seems poised to challenge the trend-channel boundary, around the $2,600 mark

From a technical perspective, the Relative Strength Index (RSI) on the daily chart has moved on the verge of breaking into the overbought zone and holding back bulls from placing fresh bets. That said, the move-up along an ascending channel since June points to a well-established short-term uptrend. Furthermore, the recent breakout through the $2,525-2,530 supply zone supports prospects for additional gains. Any subsequent move up, however, is likely to confront stiff resistance near the $2,600 round figure, above which the Gold price could climb to test the ascending channel barrier, currently pegged around the $2,620-2,625 region. A sustained strength beyond the latter will mark a fresh breakout and pave the way for a further near-term appreciating move. 

On the flip side, any corrective decline now seems to attract some buyers near the $2,555 horizontal zone. This should help limit the downside near the $2,530-2,525 resistance breakpoint, now turned support, below which the Gold price could slide back to the $2,500 psychological mark. A convincing break below the latter might prompt some technical selling and make the XAU/USD vulnerable to accelerate the slide towards the $2,470 horizontal support. This is closely followed by the $2,464 confluence, comprising the ascending channel support and the 50-day Simple Moving Average (SMA), which if broken might shift the bias in favor of bearish traders.

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.

 

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