Gold rises to all-time high on safe-haven demand, shifting Fed expectations

Source Fxstreet
May 20, 2024 10:56
  • Gold price rises on safe-haven demand after news of the President of Iran’s death ignites tensions in the region.
  • Gold rises as a general fracturing of the world order drives central banks to stock up on the precious metal. 
  • A shift in expectations of when the Federal Reserve might cut interest rates further helps non-yielding Gold. 

Gold price (XAU/USD) rallies to record highs in the $2,440s on Monday due to its safe-haven qualities as the geopolitical risk barometer rises a notch due to increased tensions in the Middle East. 

The precious metal also gains from rising expectations that the Federal Reserve (Fed) will move to cut interest rates earlier than was previously thought following tepid US economic data out last week. 

Gold price rises on geopolitics, Fed expectations

Gold price rises to a new all-time high after the news that the President of Iran, Ebrahim Raisi, as well as other high-profile political figures from Iran, died in a helicopter crash in the North of the country over the weekend, according to Reuters. This increased uncertainty in a region already simmering with tensions from the Israel-Hammas conflict. 

Russia’s opening up of a second front in the Kharkiv region and the bonding on display between Russian President Putin and Chinese President Xi during Putin’s recent visit to Beijing are further adding to a picture of a fracturing world order, with serious implications for world peace and free trade. All of which is supportive of Gold. 

Gold demand from BRICS countries and emerging economy central banks has increased substantially over recent years as a hedge against the threat of Western sanctions, according to the IMF. The trend is only likely to continue in light of recent events on the world stage. 

US Federal Reserve more likely to cut interest rates

Gold is also seeing demand as a result of a general lowering of expectations that the Federal Reserve (Fed) will maintain interest rates at their current relatively high level for much longer. 

Increasing expectations that interest rates will fall is positive for Gold as it lowers the opportunity cost of holding the non-yielding asset vis-a-vis cash or bonds. 

The change in outlook comes on the back of cooler inflation and retail sales data for April released last week. Although members of the Federal Reserve have been evasive about when the Fed might actually move to cut interest rates, the market sees a 65% chance that the fed fund rates will be lower than the current level in September, based on the CME FedWatch tool, which tracks the price of interest-rate futures. 

Speeches from a roll-call of Fed speakers on Monday could further clarify the stance of many rate-setters at the Washington institution. Atlanta Fed President Raphael Bostic, Fed Vice Chair for Supervision Michael Barr, Fed Governor Christopher Waller and Fed Vice Chair Phillip Jefferson will all be delivering speeches during the American session.

Technical Analysis: Gold price climbs parabolically 

Gold price (XAU/USD) rallies to new all-time highs above $2,440 on Monday, breaking out of the rising channel it has been in since May 2.  

The precious metal’s short-term trend is bullish, and more upside is expected given the old saying that “the trend is your friend.”  

XAU/USD 4-hour Chart

The Relative Strength Index (RSI) is overbought, however, indicating long-holders should not add to their positions. When the RSI falls back into the neutral zone (below 70), it will signal to close long-positions and that Gold price is undergoing a correction. Any such corrections are likely to find support at the upper channel line and former highs at $2,430. 

A break above the new $2,450 all-time high would likely continue the rally to the next target at the psychologically significant $2,500 level. 

The medium and long-term charts (daily and weekly) are also bullish, adding a supportive backdrop for Gold.

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.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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