Gold surges to record above $2,600 on Fed rate cut speculation

• Gold hits new all-time highs above $2,600, fueled by expectations of further Fed rate cuts.
• Increasing demand for safe havens due to rising tensions between Israel and Hezbollah concurrently.
• Fed Governor Waller Supports 50bps Rate Cut; however, dissident Fed member Michelle Bowman favors a smaller cut to protect against declaring an anticipated gain on inflation.

Gold prices breached $2,600, hitting new all-time highs amid growing speculation that the Federal Reserve will continue to cut borrowing costs and heightened tensions between Israel and Hezbollah in the Middle East. XAU/USD is trading at $2,621, up 1.37%.

Risk aversion is the name of the game, as shown by Wall Street’s top three indexes, which lost between 0.26% and 0.31%. Fed Governor Christopher Waller crossed the line and said the 50 basis point cut was appropriate, citing expectations that August’s personal consumption expenditures (PCE) price index would be very low.

Waller added that inflation is easing faster than anticipated, which is worrying. He also noted that the Fed could take further action if the labor market deteriorates or if inflation data diminishes rapidly.

Meanwhile, correlations don’t play a big role as US Treasury yields rise with the price of gold and the greenback. The 10-year US note is yielding 3.726%, up one and a half basis points. The U.S. dollar index ( DXY ), which tracks the U.S. currency against six peers, advanced about 0.08 percent to 100.71.

A limited US economic program left the direction of gold on the shoulders of other Fed speakers. Michelle Bowman disagreed with cuts lower than 50 bps. While adjusting policy was appropriate, she preferred a smaller cut because the decision risks being interpreted as a “declaration of victory over inflation”.

Recently, Philadelphia Fed Patrick Harker said risks to inflation and employment are balanced.

“Geopolitical risks such as ongoing conflicts in Gaza, Ukraine and elsewhere will ensure safe haven demand for gold is underpinned,” said one analyst quoted by Reuters.

Looking ahead to next week, the Fed parade begins with Atlanta’s Raphael Bostic, Chicago’s Austan Goolsbee and Minnesota’s Neel Kashkari. On the data front, the S&P Global Flash PMI, along with housing data and the Fed’s preferred inflation gauge, the Personal Consumer Expenditure (PCE) price index, will dictate the trajectory of XAU/USD amid an easing cycle.

Daily Market Reasons: Gold traders eye busy US schedule next week

• The general weakness of the US dollar and heightened tensions in the Middle East kept gold’s rally underway.
• Bullion prices rose more than 27% in 2024, the biggest annual increase since 2010.
• Physical gold demand from China and India eclipsed anemic inflows into gold-backed exchange-traded funds (ETFs).
• The Summary of Economic Projections indicates that the Fed expects interest rates to end at 4.4% in 2024 and 3.4% in 2025.
• Inflation, as measured by the Core Price Index for Personal Consumption Expenditures, is expected to reach the 2% target by 2026, with forecasts of 2.6% in 2024 and 2.2% in 2025.
• The US economy is likely to grow at a 2% pace in 2024, with the unemployment rate rising to 4.4% by the end of the year.
• December 2024 federal funds rate futures suggest the Fed could cut rates by at least 53 basis points, meaning the market expects a rate cut of 50 bps and one of 25 bps in the next two meetings this year.

XAU/USD Technical Outlook: Gold price hits record highs above $2,600

Gold’s uptrend continues after hitting a new all-time high (ATH) at $2,625. Even with all signs pointing to the upside, the gold metal’s rally appears overextended, opening the door for a pullback before targeting new highs.

Momentum favors buyers. The Relative Strength Index (RSI) targets bullish territory and not overbought territory. Therefore, the path of least resistance is upward sloping.

XAU/USD’s first resistance would be $2,650, followed by the psychological figure of $2,700. In the event of a pullback, the first support would be the $2,600 level, followed by the September 18 low of $2,546. A breach of the latter will expose the August 20 high, which turned into support at $2,531, before targeting the September 6 low of $2,485.