Gold price loses ground despite growing Fed rate cut bets and geopolitical risks

VaselineAugust 27, 2024

0 4 minutes read

Gold price loses ground despite growing Fed rate cut bets and geopolitical risks

Gold price attracts some sellers in the first Asian session on Tuesday.
Growing bets on a US interest rate cut this year and escalating geopolitical conflicts could limit gold’s downside.
Investors will be watching the US BC consumer confidence and home price index data due on Tuesday.

The price of gold (XAU/USD) is trading in negative territory amid a modest recovery in the US dollar (USD) on Tuesday. However, US Federal Reserve (Fed) Chairman Jerome Powell’s signal from Jackson Hole to start cutting interest rates is likely to support the precious metal. Lower interest rates are generally positive for gold because they reduce the opportunity cost of holding non-interest-paying assets. In addition, rising geopolitical tensions in the Middle East could further boost gold, a traditional safe-haven asset.

The People’s Bank of China (PBOC) halted gold purchases in July, marking the third month in a row that it did not purchase for reserves. Traders will be watching the August data for fresh momentum. Concerns about China’s sluggish economy and demand for precious metals could drag gold prices down, as China is the world’s largest producer and consumer of gold.

US Conference Board Consumer Confidence for August and Home Price Index for June are due on Tuesday. Later this week, US second quarter annualized gross domestic product (GDP) and Personal Consumer Expenditure (PCE) – Price Index data will be in focus.

Daily Digest Market Movers: Gold Price Loses Traction, Potential Downside Looks Limited

Hamas rejects new Israeli terms in Egypt’s ceasefire talks and insists that Israel be bound by the terms of a proposal put forward by US President Joe Biden and the UN Security Council, according to local news agency Aljazeera.
Federal Reserve (Fed) Bank of San Francisco President Mary Daly said it was appropriate for the Fed to start cutting interest rates, adding that it did not want to continue tightening policy as inflation eased.
Richmond Fed President Thomas Barkin said he would take a “test and learn” approach to rate cuts.
Fed Chairman Powell told the Fed’s annual economic symposium in Kansas City in Jackson Hole on Friday: “The time has come for policy to adjust.” Powell also said he was confident inflation was on track to meet the Fed’s 2 percent target.
US durable goods orders rose 9.9% month-on-month in July, from a -6.9% contraction in June, stronger than the 4% increase expected. This figure marked the most significant gain since May 2020.
According to the CME FedWatch tool, markets have fully priced in a 25 basis point (bps) rate cut, while the possibility of a deeper rate cut is 30%, down from 36.5% last Friday.

Technical Analysis: The broader bullish picture for the gold price remains intact

The price of gold is lower on that day. The yellow metal remains covered below the upper limit of the five-month-old ascending channel. However, a broader bullish outlook prevails as the precious metal is well supported above the 100-day exponential moving average (EMA) on the daily chart. The 14-day Relative Strength Index (RSI) is holding above the median line near 92.95, indicating sustained strength.

If gold breaks through resistance zones and sustainably sees ascending candlesticks above the $2,530-$2,540 area, the record high and upper limit of the trend channel, XAU/USD could play for the $2,600 psychological barrier.

On the other hand, any further selling below the August 22 low at $2,470 could attract more technical sellers and take gold into the next support zone at $2,432, the August 15 low. The key level of contention is the $2,360-$2,370 area, the lower limit of the trend channel and the 100-day EMA.

Price in US dollars this week

The table below shows the percentage change in the US dollar (USD) against the major listed currencies this week. The US dollar was the weakest against the Canadian dollar.

	USD	EURO	GBP	CAD	AUD	JPY	NZD	CHF
USD		0.19%	0.15%	-0.22%	0.21%	0.17%	0.24%	-0.10%
EURO	-0.20%		-0.05%	-0.42%	0.01%	-0.02%	0.05%	-0.29%
GBP	-0.15%	0.03%		-0.37%	0.05%	0.02%	0.11%	-0.25%
CAD	0.22%	0.41%	0.38%		0.42%	0.43%	0.47%	0.12%
AUD	-0.19%	0.00%	-0.05%	-0.43%		-0.02%	0.05%	-0.28%
JPY	-0.18%	0.02%	-0.04%	-0.43%	0.00%		0.02%	-9927.67%
NZD	-0.24%	-0.07%	-0.09%	-0.47%	-0.04%	-0.07%		-0.35%
CHF	0.08%	0.29%	0.25%	-0.12%	0.31%	0.28%	0.35%

The heatmap shows the percentage changes of major currencies against each other. The base currency is chosen from the left column, while the quoted currency is chosen from the top row. For example, if you choose Euro in the left column and move along the horizontal line to Japanese Yen, the percentage change shown in the box will be EUR (base)/JPY (quote).

Gold FAQ

Gold has played a key role in human history as it has been widely used as a store of value and medium of exchange. Today, apart from its luster and use for jewellery, the precious metal is widely seen as a safe haven, meaning it is considered a good investment during troubled times. Gold is also widely seen as a hedge against inflation and against depreciating currencies because it is not based on any particular issuer or government.

Central banks are the biggest holders of gold. In order to support their currencies in troubled times, central banks tend to diversify their reserves and buy gold to improve the perceived strength of the economy and currency. Large gold reserves can be a reliable source of a country’s solvency. Central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the largest annual purchase since records began. Central banks in emerging economies such as China, India and Turkey are rapidly 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, allowing investors and central banks to diversify their assets in troubled times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken the price of gold, while a sell-off in riskier markets tends 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 cause the price of gold to rise due to its safe haven status. As a non-yielding asset, gold tends to rise with lower interest rates, while the higher cost of money usually weighs on the yellow metal. However, most of the moves depend on how the US dollar (USD) behaves, as the asset is valued in dollars (XAU/USD). A strong dollar tends to keep gold prices in check, while a weaker dollar is likely to push gold prices higher.

VaselineAugust 27, 2024

0 4 minutes read