Gold price posted gains of over 0.18% during the North American session on Monday, bolstered by a weaker US Dollar as traders eye Wednesday’s US Federal Reserve (Fed) monetary policy decision. Expectations for a larger-than-expected rate cut bolstered the XAU/USD, which trades at $2,582 after bouncing off a daily low of $2,579.
Market sentiment is mixed ahead of the Fed’s decision. Data shows that the chances that Jerome Powell and his colleagues will deliver a 50-basis-point (bps) cut are growing. The CME FedWatch Tool shows that odds for a 50 bps cut rose from 50% to 59%, while for a 25 bps cut they stand at 41%.
The drop in US Treasury yields also supported the golden metal. The US 10-year benchmark T-note is falling two and a half bps to 3.631%, a tailwind for the non-yielding metal.
Consequently, this weighed on the Greenback, which according to the US Dollar Index (DXY) fell 0.36% to 100.74.
In the geopolitical space, risks of an escalation of the Middle East conflict remain while an apparent assassination attempt against former US President Donald Trump weakened the Greenback, according to Bloomberg.
Looking ahead, the US economic schedule will feature August Retail Sales on Tuesday. These are foreseen dropping compared to July’s solid results and are expected to guide the size of the Fed’s cut. Additionally, housing data will be released ahead of the Fed's decision and Chair Jerome Powell's press conference later in the week.
Gold's uptrend remains intact, supported by solid demand and momentum. The Relative Strength Index (RSI) is in bullish territory, staying just below the 80 level, which traders often see as an "extreme" overbought in strong trending conditions.
If XAU/USD clears the all-time high (ATH) of $2,589, the next stop would be $2,600. If surpassed, further upside could be expected with the psychological levels of $2,650 and $2,700 up next.
On the downside, Gold sellers must push prices below $2,550 to regain control. Key support levels after that include the August 20 high at $2,531, followed by the critical $2,500 mark.
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.