- Gold rallies on Tuesday as safe haven demand increases following Israel’s invasion of Lebanon.
- Fed Chair Powell takes a more cautious and data-dependent stance, limiting the yellow metal’s gains.
- Technically, XAU/USD is at risk of reversing its short-term uptrend and pushing lower.
Gold (XAU/USD) rallies more than 1.0% to trade at $2,660 per troy ounce on Tuesday after the Israeli army launched a ground invasion into Lebanon, stoking geopolitical tensions and increasing safe haven demand for Gold. This, and the fading effect of China’s stimulus program, which temporarily diverted capital back into property and recovering Chinese equity markets, are combining to help the yellow metal recover after two consecutive days of losses.
Gold could see its rise limited by the Fed’s comments
Gold will likely see its rise limited, however, by comments from Federal Reserve (Fed) Chairman Jerome Powell, who said on Monday that although the Fed made a larger interest rate cut than the standard 50 basis points ( bps) (0.50%) in their last meeting, that did not automatically imply that the same would happen in future meetings.
Powell said the FOMC “is not a committee that feels like it’s in a rush to cut rates quickly,” during his speech at the NABE conference. The Fed chair hinted that the Fed would likely make two more 25 bps cuts to interest rates before the end of the year, but that it was not on a “preset course.”
Market-based odds that the Fed will cut interest rates by 50 bps at its November meeting have fallen from over 60% last week to the mid-30% level on Tuesday, according to the CME FedWatch tool.
Aside from Powell’s comments, the stronger-than-expected data has also reduced bets of another “sizable” rate cut. Decreasing odds of a further cut have weighed on Gold, which is negatively correlated with interest rates. The yellow metal is a non-yielding asset, so when interest rates are lower, it becomes more attractive to investors, and vice versa if rates stay high or rise.
Technical Analysis: Gold resumes bullish trend after deep correction
Gold recovers after pulling back to the 50 SMA on the 4-hour chart.
There is a risk that more weakness could follow, pushing Gold towards the trend line around $2,615-2,620. A break below Monday’s low at $2,625 would provide bearish confirmation of such a move.
XAU/USD 4-hour chart
In the medium to long term, however, Gold remains in an uptrend and since it is a fundamental principle of technical analysis that “the trend is your friend”, the odds favor an upward resumption. A break above the all-time high of $2,685 would confirm a bullish continuation towards the round number targets at $2,700 and then $2,750.
Alternatively, a break below the trendline could lead to further weakness until firm support is reached at $2,600 (September 18 high), followed by $2,550 and then $2,544 (0.382 Fib retracement). September rally).
Gold FAQs
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, apart 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.
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 Türkiye are rapidly increasing their gold reserves.
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.
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
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
