Gold Price Forecast: XAU/USD extends upside above $3,750 as Fed rate cut hopes intact
- Gold price drifts higher to near $3,770 in Monday’s early Asian session.
- The US PCE price index rose 2.7% YoY in August, in line with expectations.
- Traders await the Fedspeak later on Monday for fresh impetus.
Gold price (XAU/USD) extends the rally to around $3,770 during the early Asian session on Monday. The precious metal edges higher after the US inflation data came in line with expectations, reinforcing bets that the US Federal Reserve (Fed) may continue with interest rate cuts later this year. Traders will keep an eye on the Fedspeak later on Monday.
US inflation, as measured by the US Personal Consumption Expenditures (PCE) Price Index, rose to 2.7% year-on-year in August from 2.6% in July, the US Bureau of Economic Analysis reported Friday. This figure aligned with the market consensus. Meanwhile, the core PCE Price Index, which excludes volatile food and energy prices, rose 2.9% year-over-year in August, matching the increase in July and analysts' estimates. On a monthly basis, the PCE and the core PCE increased 0.3% and 0.2%, respectively.
"Monthly PCE data is in line, though personal income and spending were a tenth above expectations. Nothing from this data will prevent the Fed from carrying on with another cautious rate cut at the October meeting," said Tai Wong, an independent metals trader.
Markets are now pricing in nearly an 88% odds of a Fed rate cut in October and a 65% possibility of another reduction in December, according to the CME FedWatch Tool. Lower interest rates could reduce the opportunity cost of holding Gold, supporting the non-yielding precious metal.
Traders will take more cues from the Fedspeak later in the day. Fed Governor Christopher Waller, Cleveland Fed President Beth Hammack, St. Louis Fed President Alberto Musalem, New York Fed President John Williams, and Atlanta Fed President Raphael Bostic are set to speak. Any hawkish comments from Fed officials might boost the US Dollar (USD) and undermine the USD-denominated commodity price.
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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