Gold Reaches New High on Chinese Stimulus, Dovish Fed Bets

• Gold hits new high after China cuts stimulus and cuts interest rates.
• Continued bets that the Fed will do another jumbo rate cut before the end of the year are also fueling the rally.
• The intensifying conflict in the Middle East threatens to turn into all-out war, generating security flows.

Gold (XAU/USD) breaks past all-time high to hit a new high of $2,640 per troy ounce on Tuesday. Market bets on more aggressive interest rate cuts by the Federal Reserve (Fed) are a major factor. News of a big stimulus push in China, which includes interest rate cuts, is also a factor. Meanwhile, escalating geopolitical tensions in the Middle East are increasing refuge flows into the yellow metal.

Lower interest rates are positive for gold because they lower the opportunity cost of holding the non-interest-paying asset, making it more attractive to investors.

Gold hits new highs as market predicts more cuts to come

Gold is hitting highs as market-based odds of the Fed making another double dose of 50 basis point (bps), or 0.50%, rate cut remain elevated. The odds of such a cut at the November meeting are currently 50.2% versus 49.8% for a 25bps cut, according to the CME FedWatch tool.

On Monday, Fed Bank of Atlanta President Raphael Bostic — a voting member — was relatively neutral in his comments on policy, scoring a 4.0 on FXStreet’s FedTracker, which rates the tone of Fed officials’ speeches on a scale from 0 to 0. to 10, using a custom AI model.

Non-voting Fed Bank of Atlanta President Austan Goolsbee struck a much more dovish tone, saying inflation had “come down a lot” and there would be “many more” cuts on the way. His comments earned a 2.0 on FXStreet’s FedTracker.

Fed Bank of Minneapolis President Neel Kashkari (non-voting member) was neutral, scoring a 3.6 on FedTracker.

On Tuesday, Federal Reserve Governor Michelle Bowman (voter – solicit) will deliver a speech on the US economic outlook and monetary policy at the annual Kentucky Bankers Association Convention.

Gold was helped by the stimulus deposit from the People’s Bank of China

Gold rallies after the People’s Bank of China (PBoC) announced the biggest stimulus package since the Covid pandemic on Tuesday. The PBoC is trying to fight deflation and support the economy to reach its official annual growth target of around 5.0%.

“The broader-than-expected package, which offers more funding and interest rate cuts, marks the latest attempt by policymakers to restore confidence in the world’s second-largest economy after a series of disappointing data raised concerns of a prolonged structural slowdown,” Reuters said.

The PBoC said it would cut the seven-day reverse repo rate, its new benchmark by 20 basis points to 1.5%, the medium-term lending facility by 30bps to 2.30% and prime rates of five and one year by 25. -30 bps.

PBoC Governor Pan Gongsheng also announced that the central bank will soon reduce the amount of cash banks must hold as reserves – known as reserve requirements (RRR) – by 50 bps. That is likely to free up about 1 trillion yuan ($142 billion) in new borrowing, according to Reuters.

Pan also added that depending on the market liquidity situation at the end of this year, the RRR may be further reduced by between 25 and 50 bps.

As a country, China is the largest gold market.

Tensions in the Middle East are rising, supporting refugee flows

Israel stepped up its bombing of Hezbollah targets in Lebanon overnight, killing more than 492 people, many of them women and children, according to the BBC.

Hezbollah retaliated by bombing military targets in northern Israel.

Gold could rise further if the situation turns into a full-scale conflict. As for what such an escalation might look like, BBC International editor Jeremy Bowan offers an interpretation.

“…some sort of ground operation involving (Israel) sending tanks and troops into Lebanon. And that, I think, then gets into a very escalating and dangerous situation,” Bowan said.

Technical analysis: Gold hits a new high of $2,640

Gold hits new highs on Tuesday. Given the principle in technical analysis that “the trend is your friend”, the odds further favor the advantage for the yellow metal in line with the dominant trends in the long, medium and short term.

XAU/USD Daily Chart

The next upside targets are the round numbers: first $2,650 and then $2,700.

Gold entered overbought levels on Friday, according to the Relative Strength Index (RSI). This advises traders not to add to their long positions. If gold breaks out of overbought, it will be a sign for them to close out long positions and sell short, as it would suggest that a deeper correction is underway.

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).