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31.07.2024, 07:08

Gold price gains on Middle East tensions, focus is on Fed policy

  • Gold price rises to near $2,420 as upside risks to Middle East tensions have improved its safe-haven appeal.
  • The major trigger for the Gold price will be the Fed’s guidance on interest rates.
  • Investors see the Fed leaving interest rates unchanged with a dovish guidance.

Gold price (XAU/USD) exhibits a strong performance in Wednesday’s European session, with investors focusing on the Federal Reserve’s (Fed) monetary policy outcome later the day. The precious metal climbs to near $2,420 as its safe-haven appeal improves amid fears that Middle East tensions would widen further. Historically, investors find investment in precious metals as safe bet amid geopolitical tensions.

Fears of an all-out war between Israel and Iran deepened after reports showed that Hamas leader Ismail Haniyeh was killed in an Israeli air strike on Tehran. This has prompted fears of a retaliation move by Iran, which would diminish hopes of a ceasefire significantly.

Meanwhile, the US Dollar remains in a tight range amid uncertainty over Fed policy outcome. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers above 104.00. 10-year US Treasury yields remain on the backfoot near 4.14%.

Daily digest market movers: Gold price strengthens while US Dollar consolidates

  • Gold price gains further above $2,400 ahead of the Fed policy meeting, in which the central bank is expected to leave interest rates unchanged in the range of 5.25%-5.50% for the eighth time in a row. As the CME FedWatch tool shows that the decision to maintain a status quo is widely anticipated, investors will keenly focus on the Fed’s guidance on interest rates.
  • In the monetary policy statement and the press conference, Fed Chair Jerome Powell is expected to reiterate that inflation has returned to a path that leads to the bank’s target of 2%. Jerome Powell may also highlight rising risks to the labor market. It would be a tough call for Powell to provide a timeline for rate cuts as the battle against inflation is far from over and the United States (US) economy is growing at a robust pace.
  • The US labor market strength appears to be moderating due to the long-term maintenance of a restrictive policy framework. The Unemployment Rate in June, at 4.1%, was recorded as the highest in more than two years. Also, JOLTS Job Openings data grew almost steadily in June. Job vacancies in June came in at 8.18 million against expectations of 8.03 million but were lower than the prior release of 8.23 million, suggesting that job demand has moderated.
  • According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that the central bank will reduce interest rates by 25 basis points (bps) from their current levels in the September meeting. The data also shows that there will be two rate cuts instead of one, as policymakers projected in the latest Fed dot plot.
  • Before the Fed policy announcement, investors will focus on the ADP Employment Change data for July, which will be published at 12:15 GMT. The report is estimated to show that private payrolls rose steadily by 150K.
  • The entire week is expected to remain volatile for the FX domain as two more crucial US data are lined up for release this week. These are the ISM Manufacturing Purchasing Managers’ Index (PMI) and the Nonfarm Payrolls (NFP) for July, which will be published on Thursday and Friday, respectively.

Technical Analysis: Gold price jumps above $2,400

Gold price trades in a channel formation on a daily timeframe, which is slightly rising but has been broadly exhibiting a sideways performance for more than three months. The 50-day Exponential Moving Average (EMA) near $2,366 continues to provide support to the Gold price bulls. 

The 14-day Exponential Moving Average (EMA) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants. 

Fresh upside would appear if the Gold price breaks above its all-time high of $2,483.75, which will send it into unchartered territory.

On the downside, the Gold price will find support near the upward-sloping trendline around $2,225, plotted from October 6 low near $1,810.50.

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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