Gold price bulls retain control despite modest USD strength, risk-on environment
- Gold price remains close to a nearly two-month top set on Monday amid rising Fed rate cut bets.
- Investors seem convinced that the Fed will begin its rate-cutting cycle at the September meeting.
- The risk-on mood, along with a modest US Dollar strength, might cap the upside for the XAU/USD.
Gold price (XAU/USD) attracts some dip-buyers during the Asian session on Tuesday and for now, seems to have stalled the previous day's late pullback from the $2,430 area, or its highest level since May 20. The overnight comments from Federal Reserve (Fed) Chair Jerome Powell reaffirmed market expectations that the US central bank will begin cutting interest rates as soon as September. This keeps the US Treasury bond yields depressed and is seen as a key factor acting as a tailwind for the non-yielding yellow metal.
Meanwhile, a failed assassination attempt on leading Republican candidate Donald Trump improved his chances of winning the 2024 presidential election and raised hopes of a looser regulatory environment. This further boosts investors' appetite for riskier assets and might keep a lid on any meaningful appreciating move for the safe-haven Gold price. Moreover, the assumption that Trump policies would add to government debt and inflation benefits the US Dollar (USD), which could also contribute to capping the upside for the XAU/USD.
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Daily Digest Market Movers: Gold price continues to draw support from dovish Fed expectations
- Federal Reserve Chair Jerome Powell said on Monday that the recent inflation data had added to confidence that price increases are returning to the target in a sustainable fashion.
- The US Labor Department reported last week that the headline CPI dipped in June for the first time in more than four years, and the yearly rate decelerated to 3% from 3.3% in May.
- Powell added that the Fed doesn't expect to wait until inflation reaches 2% before acting, suggesting that rate cuts may not be far off and lending some support to the Gold price.
- The current market pricing indicates a greater chance that the Fed will lower borrowing costs in September and the possibility of another interest rate cut by the end of this year.
- The US Dollar, meanwhile, gains some positive traction and moves away from over a three-month low touched on Monday, which might cap any further gains for the commodity.
- Apart from this, an extension of the risk-on rally across the global equity markets should contribute to keeping a lid on the safe-haven XAU/USD ahead of the US Retail Sales.
- According to the consensus estimates, the headline sales are expected to remain flat in May, while sales excluding automobiles are forecasted to rise by 0.1% during the reported month.
Technical Analysis: Gold price seems poised to retest all-time peak, near $2,450 touched in May
From a technical perspective, last week's breakout through the $2,390-2,388 supply zone and sustained strength above the $2,400 mark favors bullish traders. Furthermore, oscillators on the daily chart hold in positive territory and are still away from being in the overbought zone, suggesting that the path of least resistance for the Gold price is to the upside. Hence, a subsequent strength towards challenging the all-time peak, around the $2,450 area touched in May, looks like a distinct possibility. Some follow-through buying will be seen as a fresh trigger for bullish traders and pave the way for an extension of the recent uptrend witnessed over the past three weeks or so.
On the flip side, dips below the $2,400 round figure could now be seen as a buying opportunity and remain limited near the $2,390-2,388 resistance breakpoint. Some follow-through selling, however, could drag the Gold price to the $2,358 region with some intermediate support near the $2,372-2,371 area. The subsequent fall might expose the 50-day Simple Moving Average (SMA) support, currently pegged near the $2,350 region.
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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