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Gold bulls near two-week highs on expectations of Fed rate cuts

  • The price of Gold gains ground for the second consecutive day due to the Fed’s moderate expectations.
  • Markets are now pricing in the possibility of a rate cut in the first half of 2024.
  • XAU/USD remains on track to post gains for the first time in three weeks.

The price of Gold (XAU/USD) maintains its modest intraday gains heading into the European session and is currently trading around the $1,984-$1,983 area, just below the nearly two-week high reached the previous day. The lackluster macroeconomic data released this week in the US, such as the weaker CPI and PPI figures for October, reinforced the view that the Federal Reserve (Fed) tightening cycle has come to an end. In addition, markets are beginning to expect interest rate cuts, perhaps in the first half of 2024. This keeps the benchmark 10-year US government bond yield near its lowest level in more than two months, which seems to support the yellow metal, which is not performing.

Meanwhile, the Fed’s dovish expectations are not helping the US Dollar (USD) post a significant recovery from its lowest level since September 1 hit following Tuesday’s US consumer inflation figures. Apart from this, the mixed signals from the high-level talks between the US and China lend additional support to the safe-haven Gold price and support the prospects of a fresh appreciation move in the near term. Investors are now hoping for fresh momentum from US housing market data and statements from the Federal Reserve. However,

Daily Market Summary: Gold price continues to receive support from hopes of a dovish turn from the Fed.

  • The price of Gold has recovered more than $50 from a multi-week low, around the $1,932-$1,931 area touched on Monday in the wake of expectations that the Federal Reserve has finished raising interest rates.
  • The US CPI, released earlier this week, indicated that consumer inflation was cooling faster than expected, while jobless claims on Thursday pointed to a cooling in the labor market.
  • The headline CPI was unchanged in October, while the annual rate posted its smallest rise in two years and slowed sharply to 3.2% from 3.7% in September.
  • The number of Americans filing for unemployment insurance for the first time increased to 231,000 during the week of November 11, up from 218,000 previously (revised from 217,000).
  • Furthermore, the recent drop in oil prices is expected to have a disinflationary effect, which should bring the Fed closer to its 2% target and allow it to soften its hawkish stance.
  • This week, a series of influential Fed officials acknowledged the progress made in curbing inflation, reinforcing the idea that the campaign to tighten monetary policy could soon come to an end.
  • Traders now seem convinced that interest rates in the US will not rise. Additionally, the CME Group’s FedWatch tool indicates the growing possibility of the first rate cut before March 2024.
  • The benchmark ten-year US government bond yield fell to almost two-month lows on Thursday and continues to weaken the dollar, supporting the price of gold.
  • US President Joe Biden and his Chinese counterpart Xi Jinping agreed to reopen military channels, marking some improvement in relations between the world’s two largest economies.
  • Hours after the summit, Biden called Xi a “dictator,” possibly upsetting Chinese officials.
  • Now, in the final trading day of the week, traders will be watching US housing market data and a scheduled speech by Chicago Fed President Austan Goolsbee for short-term opportunities.

Technical Analysis: Gold price takes a brief pause before the next rise above the psychological level of $2,000

Technically, a sustained move and acceptance above the $1,980 level could have already laid the foundation for further upside. Furthermore, the daily chart oscillators remain comfortably in positive territory and are still far from the overbought zone. This, in turn, suggests that the path of least resistance for the price of Gold is upwards and supports the prospects of a move towards recovering the psychological level of $2,000. The momentum could extend further towards a multi-month high around the $2,009-$2,010 area, which if broken decisively will be seen as a new trigger for the bulls.

On the other hand, the $1,975 area seems to protect the immediate decline ahead of the $1,970 level and the $1,962-$1,961 support zone. Continued selling, with a consequent break below the $1,955 area, could change the bias in favor of the bears and make the price of Gold vulnerable to accelerate the decline towards the SMA of 200 days, currently around the $1,937-$1,936 region. This is followed by the confluence of the 100-day and 50-day SMAs, around the $1,929-$1,927 area, which if broken should pave the way for some significant short-term depreciation move.

Frequently asked questions about Gold

Why invest in Gold?

Gold has played a fundamental role in human history, as it has been widely used as a store of value and medium of exchange. Today, aside from its brilliance and use for jewelry, the precious metal is considered a safe-haven asset, meaning it is considered a good investment in turbulent times. Gold is also considered a hedge against inflation and currency depreciation, since it does not depend on any specific issuer or government.

Who buys more Gold?

Central banks are the largest holders of Gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase Gold to improve the perception of strength of the economy and currency. High Gold reserves can be a source of confidence for the solvency of a country. Central banks added 1,136 tons 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 exist. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.

What correlation does Gold have with other assets?

Gold has an inverse correlation with the US Dollar and US Treasuries, which are the main reserve and safe haven assets. When the Dollar depreciates, the price of Gold tends to rise, allowing 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 the price of Gold, while sell-offs in riskier markets tend to favor the precious metal.

What does the price of Gold depend on?

The price of Gold can move due to a wide range of factors. Geopolitical instability or fear of a deep recession can cause the price of Gold to rise rapidly due to its status as a safe haven asset. As a non-yielding asset, the price of Gold tends to rise when interest rates fall, while rising money prices tend to weigh down the yellow metal. Still, most of the moves depend on how the US Dollar (USD) performs, as the asset is traded in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold in check, while a weaker Dollar is likely to push up Gold prices.

Source: Fx Street

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