Gold extends rally amid geopolitical risks and Fed rate cut bets; fresh record high and counting
- Gold prolongs its record-setting run and continues to draw support from a combination of factors.
- Geopolitical risks, fears of a US government shutdown and Fed rate cut bets underpin the bullion.
- Dovish Fed expectations keep the USD depressed and further benefit the non-yielding commodity.
Gold (XAU/USD) continues scaling new record highs during the Asian session on Tuesday and climbs beyond the $3,250 level amid a supportive fundamental backdrop. Against the backdrop of escalating geopolitical tensions, the risk of a potential US government shutdown underpins demand for the safe-haven bullion. Apart from this, firming expectations for further interest rate cuts by the US Federal Reserve (Fed) turn out to be another factor driving flows towards the non-yielding yellow metal.
Meanwhile, the US Dollar (USD) struggles to attract any meaningful buyers and consolidates its losses registered over the past two days on the back of the Fed's dovish outlook. This offers additional support to the Gold. The momentum seems unaffected by extremely overbought conditions on short-term charts, suggesting that the path of least resistance for the XAU/USD pair remains to the upside. Traders now look to this week's US macro data, including the Nonfarm Payrolls (NFP) report for a fresh impetus.
Daily Digest Market Movers: Gold bulls retain control amid Fed rate cut bets and sustained safe-haven demand
- The last-gasp meeting hosted by US President Donald Trump with top Republican and Democratic congressional leaders yielded no budget breakthrough. Vice President JD Vance said that a government shutdown is bound to happen as an impasse remains over the flow of funding.
- Russia said on Monday that its military was analysing whether the US would supply Tomahawk cruise missiles to Ukraine for strikes deep into Russia. Russian officials added that such a move could trigger a steep escalation, keeping geopolitical risks in play and benefiting the bullion.
- Meanwhile, Trump said that the US was very close to securing peace in the Gaza war after releasing a 20-point plan. Trump also issued a warning to the Palestinian group Hamas that Israel will have the US's full backing to destroy the militant group if it rejects the peace deal.
- Trump signed a proclamation adjusting imports of timber, lumber, and derivative products into the US. This comes on top of a 100% tariff on imports of branded or patented pharmaceutical products , 25% levies on imports of all heavy-duty trucks starting October 1, announced last week.
- According to the CME Group's FedWatch Tool, traders are pricing in a 90% chance that the Fed will lower borrowing costs by 25 basis points in October and a nearly 70% possibility for another rate cut in December. This keeps the US Dollar depressed and underpins the precious metal.
- Tuesday's US economic docket highlights JOLTS Job Openings data and the Conference Board's Consumer Confidence Index. This, along with speeches by influential FOMC members, would drive the USD demand later during the North American session and drive the XAU/USD pair.
Gold uptrend remains uninterrupted; overbought RSI warrants caution for bullish traders
The overnight breakout through and close above the $3,800 round figure for the first time was seen as a fresh trigger for the XAU/USD bulls. A subsequent strength beyond the $3,850 level backs the case for a further appreciating move. However, the daily Relative Strength Index (RSI) is hovering around the 80.00 mark and points to extremely overbought conditions. This, in turn, makes it prudent to wait for some near-term consolidation or a modest pullback before positioning for any extension of the recent well-established uptrend witnessed over the past month or so.
On the flip side, any corrective pullback below the $3,850 resistance breakpoint could be seen as a buying opportunity near the $3,835-3,834 horizontal zone. Some follow-through selling could pave the way for a slide towards the $3,822 region, though the downside is more likely to remain cushioned near the $3,800 round figure. The latter might now act as a key pivotal point, which, if broken decisively, should pave the way for deeper losses.
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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