- Gold is trading near its all-time high of $2,531 amid expectations of a Fed rate cut and a weak US dollar.
- The size of the Fed cut at its September meeting will impact Gold.
- Wednesday’s US CPI data could influence the Fed’s decision.
Gold (XAU/USD) is back up towards the top of its three-week range, trading just below $2,530 on Wednesday. The precious metal continues to seesaw as investors debate the size of the interest rate cut the Federal Reserve (Fed) will make at its meeting on September 17-18. While a standard 25 basis point (bp) – or 0.25% – cut is now expected, some believe the Fed could opt for a larger 50 bp cut. The latter would increase Gold’s attractiveness compared to other assets because it is a non-interest-paying asset.
Friday’s mixed US Non-Farm Payrolls release failed to resolve the question of the size of the rate cut. On Wednesday, US Consumer Price Index (CPI) data for August would normally be expected to strongly influence Fed expectations. However, analysts vary in the extent to which they expect the data to have an impact this time – some say inflation has fallen so much that it is now irrelevant.
“The (CPI) figure is no longer as overwhelmingly important as it was a few months ago,” says Ulricht Leutchmann, FX Analyst at Commerzbank. “The fight against inflation seems to have been won. Over the past three months, core consumer price inflation was a meager 1.6% (annualized) – well below levels that would be compatible with the Fed’s target,” he adds.
On the other hand, Elias Haddad, Senior Market Strategist at Brown Brothers Harriman (BBH), says: “Higher-than-expected US inflation in August may reduce the likelihood of a jumbo Fed rate cut in September and support a firmer USD.”
Meanwhile, Deutsche Bank’s Jim Reid points out that a major deflationary factor is the sharp drop in crude oil prices in recent days, with WTI crude now trading in the mid-$60s per barrel. “From the Fed’s perspective, one trend that is helping to remove inflationary pressures has been the sharp drop in oil prices in recent weeks,” Reid says in his “Early Morning.”
Gold boosted by weaker US dollar
Gold is gaining further momentum due to a weaker US Dollar (USD), to which it is negatively correlated (the yellow metal is primarily quoted and traded in USD).
The dollar is being dragged down by the outcome of the presidential debate between Trump and Harris. According to most analysts, Vice President Kamala Harris came out on top, so the market is pricing in former President Donald Trump’s policies to keep the US dollar as the world’s reserve currency by penalizing countries that refuse to use it with tariffs.
That said, the effect is likely to be offset given that the former president is also known for advocating for a weaker dollar because it helps US exports.
On the geopolitical risk front, Israel continues to bombard civilian areas in Gaza, and protests by the population calling for a ceasefire so that hostages can be freed appear to be falling on deaf ears. The attack on the Al-Mawasi camp, which killed dozens earlier this week, has drawn condemnation from the international community and dampened U.S. efforts to broker a ceasefire agreement.
On the other hotspot, news of a Ukrainian drone attack in Moscow has likely only heightened tensions, which if anything could be increasing safe-haven demand for Gold.
Technical Analysis: Gold targets top of range and all-time highs
Gold (XAU/USD) is climbing towards the top of its sideways range. It is now approaching the all-time high of $2,531. A break above it would extend the bullish trend of the precious metal.
XAU/USD 4-hour chart
Alternatively, it is quite possible that the yellow metal will continue to trade up and down within its multi-week range between $2,480 and the record high of $2,531.
The long-term trend for Gold is bullish, however, and since “the trend is your friend,” this increases the odds that an upside breakout will eventually materialize.
The precious metal has a yet-to-be-reached upside target at $2,550, generated after the original breakout of the July-August range on August 14. It will likely finally reach its target at the end, assuming the uptrend survives.
A break above the August 20 all-time high of $2,531 would provide further confirmation of an upside continuation towards the target of $2,550.
If Gold closes below $2,460, however, it would change the outlook and call into question the bullish bias.
Gold FAQs
Gold has played a pivotal role in human history as it has been widely used as a store of value and a medium of exchange. Today, apart from its luster 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 as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. In order to support their currencies in turbulent times, central banks tend to diversify their reserves and buy gold to improve the perception of the strength of the economy and the currency. High gold reserves can be a source of confidence in a country’s solvency. Central banks added 1,136 tonnes 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 on record. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasury bonds, 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.
Gold prices can move due to a wide range of factors. Geopolitical instability or fears 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, Gold prices tend to rise when interest rates fall, while rising money prices often weigh down the yellow metal. Still, most of the moves depend on how the US Dollar (USD) performs, as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep Gold prices in check, while a weaker Dollar is likely to push Gold prices higher.
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.
