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19 Sep 2024
Gold price remains on the defensive amid the post-FOMC USD recovery from YTD low
- Gold price struggles to lure buyers despite the Fed’s jumbo interest rate cut on Wednesday.
- A further recovery in the US bond yields underpins the USD and caps the non-yielding metal.
- Concerns about an economic slowdown, along with geopolitical risks, help limit the downside.
Gold price (XAU/USD) witnessed an intraday turnaround after hitting a new record high, around the $2,600 mark and settled in the red for the second straight day on Wednesday. The initial spike in the commodity followed the US Federal Reserve's (Fed) decision to kick-start the policy-easing cycle with an oversized rate cut. The rally, however, ran out of steam after Fed Chair Jerome Powell cooled hopes for a string of 50 basis point rate cuts ahead, which triggered a sharp US Dollar (USD) recovery from a 14-month low and weighed on the non-yielding yellow metal.
Gold price subsequently dropped to a four-day low, though a combination of factors helped limit further losses. Investors remain concerned about an economic slowdown in the United States (US) and China – the world's two largest economies. This, along with persistent geopolitical risks stemming from the ongoing conflicts in the Middle East, offers some support to the safe-haven precious metal. That said, some follow-through USD buying failed to assist the commodity in registering any meaningful recovery and remained depressed during the Asian session on Thursday.
Daily Digest Market Movers: Gold price is undermined by rising US bond yields and a modest USD strength; downside seems limited
- Gold prices faded from the post-FOMC spike to a fresh record high and dived to a multi-day low on Wednesday amid a goodish US Dollar recovery from its lowest level since July 2023.
- The Federal Reserve lowered its benchmark interest rate by 50 basis points to the 4.75%-5% range and forecast rates falling by another half of a percentage point by the end of this year.
- In the so-called dot plot, Fed members projected rates falling to 3.4% in 2025, down from a prior forecast of 4.1%, and declining to 2.9% in 2026, down from a prior forecast of 3.1%.
- The new economic projections revealed that the Fed doesn't see inflation returning to the 2% target before 2026, raising questions about the magnitude of interest rate cuts going forward.
- Meanwhile, Fed Chair Jerome Powell, during the post-meeting press conference, downplayed concerns about a recession amid cooling inflationary pressures and a very solid labor market.
- This, in turn, triggered a sharp rise in the US Treasury bond yields, which extends through the Asian session on Thursday and assists the Greenback to build on its recovery momentum.
- Iran-backed Hezbollah said it attacked Israeli artillery positions with rockets on Wednesday in retaliation to blasts in Lebanon, which killed 20 people and injured more than 450.
- Israel’s Defence Minister Yoav Gallant declared the start of a new phase in the war, raising the risk of a wider Middle East conflict, which could benefit the safe-haven XAU/USD.
Technical Outlook: Gold price could extend the corrective slide once the $2,532-2,530 immediate support is broken decisively
From a technical perspective, any subsequent slide is more likely to find decent support near the previous cycle high, around the $2,532-2,530 area. Some follow-through selling will expose the next relevant support near the $2,517-2,515 area, below which the Gold price could accelerate the corrective decline to the $2,500 psychological mark. The downward trajectory could extend further towards the $2,470 confluence – comprising the 50-day Simple Moving Average (SMA) and the lower boundary of a short-term ascending channel. The latter should act as a key pivotal point, which if broken decisively might shift the near-term bias in favor of bearish traders.
On the flip side, the $2,577-2,578 region now seems to act as an immediate hurdle ahead of the $2,600 mark, or the all-time peak touched on Wednesday. The subsequent move up could allow the Gold price to challenge the trend-channel resistance, currently pegged near the $2,610-2,612 region. A convincing breakout through the said barrier will be seen as a fresh trigger and set the stage for an extension of the recent well-established uptrend witnessed over the past three months or so.
Gold FAQs
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.