Gold retreats as global factors ease, Fed to be more measured

• Gold retreats at the end of the week as the effect of Chinese stimulus fades and global central banks take a more cautious stance.
• Stronger US labor market and economic growth data reduce the chances of the Fed easing aggressively.
• The price of gold retreats as a less favorable interest rate outlook and a stronger US dollar are bearish.

Gold (XAU/USD) edged lower to trade at $2,660 a troy ounce on Friday as the impact of Chinese government stimulus begins to fade and central banks globally take a less accommodative stance.

In addition, better-than-expected US data reduced the chances of the Fed making another aggressive rate cut of 50 basis points (bps) in November. This further weighs on gold as expectations of interest rates falling at a slower pace suggest a high opportunity cost of holding the non-interest bearing asset. The USD is also recovering, adding to the precious metal’s headwinds.

Gold margins fall after hitting new record highs

Gold retreats after hitting a fresh record high of $2,685 on Thursday as the effect of the additional CNY1 trillion stimulus announced by the Chinese Politburo appears to have been priced in and global central banks tend to take a less dovish stance conciliatory. The Central Bank of Sri Lanka kept rates unchanged at their meeting and the Swiss National Bank (SNB) and Banco de Mexico (Banxico) cut rates by just 25 bps. Meanwhile, a recent Reuters poll showed that the Reserve Bank of India (RBI) is expected to cut interest rates by 50 bps over the next six months.

In addition, expectations for the Fed to cut interest rates by half a percentage point at their November meeting have eased after positive US macroeconomic data. US initial jobless claims indicated a decline to 218,000 in the week ended September 20, and the final estimate of Q2 gross domestic product (GDP) growth remained in line with previous estimates at a fairly modest 3.0% annual healthy. In addition, US durable goods orders beat estimates and overall recent US data paint a soft landing for the economy that defies market bets for aggressive monetary easing.

According to the CME FedWatch tool, the probability of a 50 bps rate cut at the November Fed meeting fell to 50% from more than 60% ahead of the data.

Gold may also see reduced refugee flows as fears that the conflict between Israel and Hezbollah could spill over into a ground offensive fail to materialize. Although tensions remain high and a 21-day ceasefire agreed by the Americans was rejected on Thursday, the situation has not escalated either.

On Wednesday, Israel Defense Forces chief Herzi Halevi told his troops that they should prepare for a ground offensive on Lebanon. If such an invasion were to occur, it would further increase risk aversion and increase refuge flows into the yellow metal.

Technical Analysis: Gold retreats from new all-time highs

Gold retreats after hitting another all-time high of $2,685 on Thursday.

That being said, it is generally still in an uptrend in the short, medium and long term. Since it is a basic tenet of technical analysis that “the trend is your friend,” the odds further favor the yellow metal’s advantage.

XAU/USD Daily Chart

Gold is also now overbought according to the Relative Strength Index (RSI) momentum indicator, which increases the chances of a deeper pullback unfolding. It also advises traders not to add to their long positions. If gold breaks out of overbought, it will be a sign to exit long positions and sell shorts, suggesting that an even deeper correction is underway.

That said, the RSI can remain overbought for quite some time in a strongly trending market, and if gold makes higher highs, it will further reaffirm the metal’s uptrend. The next upside targets are the round numbers $2,700 and then $2,750.

If a correction develops, firm support is at $2,600 (September 18 high), $2,550 and $2,544 (0.382 Fibonacci retracement of the September rally).