Gold supported by bets on further Fed rate cuts and Middle East tensions

• Gold continues its upward trend as markets price in more Fed rate cuts.
• These cuts would make gold, a non-yielding asset, more attractive.
• Rising tensions between Israel and Lebanon are increasing demand for safe haven precious metals.

Gold (XAU/USD) is pulling back slightly on Monday after hitting a fresh all-time high of $2,631 earlier in the day, as markets continue to price in more aggressive interest rate cuts from the Federal Reserve (Fed) while rising geopolitical tensions stemming from the Middle East increase safe-haven demand for the precious metal.

As for the Fed rate cuts, lower interest rates are positive for Gold as they reduce the opportunity cost of holding the non-interest-paying asset, making it more attractive to investors.

As such, the People’s Bank of China’s (PboC) decision to cut its 14-day reverse repurchase rate by 10 basis points (bps) to 1.85% on Monday morning, as well as inject additional liquidity into the financial system, likely further increased gold’s attractiveness.

Gold hits new highs as market eyes further cuts

Gold soars to fresh ATHs on Monday as markets price in the possibility of another double-dose interest rate cut by the Federal Reserve before Christmas. Odds of the Fed cutting interest rates by 50 bps (0.50%) again at the next meeting in November currently stand at 51.6% versus 48.4% for a 25 bps cut, according to the CME FedWatch tool.

Recent comments by Federal Reserve Bank of Philadelphia President Patrick Harker (voting member) on Friday afternoon suggested that while the labor market may be weakening, there was a risk that “the decline in inflation could stall.” His comments earned a score of 5.8 on FXStreet’s FedTracker, which measures the tone of Fed officials’ speeches on a dovish-to-hawkish scale from 0 to 10 using a custom AI model.

There will be more comments from Fed members next week, which could impact expectations about Fed policy and the price of gold:

• On Monday, Atlanta Fed President Raphael Bostic (voting – moderate) will open the session, followed by Chicago Fed President Austan Goolsbee (non-voting – moderate), who “could give indications that he is looking for a continuation of large rate cuts,” according to Jim Reid, head of macroeconomic research at Deutsche Bank. Later in the day, Minneapolis Federal Reserve Bank President Neel Kashkari is also scheduled to speak.
• On Tuesday, Federal Reserve Governor Michelle Bowman (a hawkish vote) will give a speech on the U.S. economic outlook and monetary policy at the Kentucky Bankers Association Annual Convention.
• Fed Board of Governors member Adriana Kugler (voting – neutral) will speak on Wednesday and then participate in a discussion with Boston Fed President Susan Collins (non-voting – moderate) on Thursday.
• Also on Thursday, Fed Board of Governors member Michelle Bowman will speak – she was the first governor to dissent at an FOMC since 2005. On the same day, the 10th annual U.S. Treasury market conference is held. Fed Chair Jerome Powell will open with pre-recorded remarks.
• Also speaking at the same conference will be New York Fed President John Williams (voter – Moderate) and Fed Vice Chair for Supervision Michael Barr (voter – Moderate).

UN warns of catastrophe in Middle East

The United Nations (UN) has warned that the Middle East is on the brink of catastrophe as Israel and Lebanon edge closer to all-out war.

Over the weekend, Israel attacked targets in Lebanon and Hezbollah responded with rocket attacks in northern Israel. It is possible that Israel could mount a ground invasion of Lebanon, further escalating the war. Such an event would likely boost the price of gold.

“If Hezbollah doesn’t back down, which I don’t think they will because fighting Israel is deep in their DNA, Israel has said ‘they will do more’,” says Jeremy Bowan, the BBC’s international editor. “That could be some kind of ground operation involving sending tanks and troops into Lebanon. And that, I think, then gets into a very escalatory and dangerous situation,” Bowan added.

Technical Analysis: Gold’s uptrend continues

Gold extends its uptrend, hitting new all-time highs on Monday. Given the principle in technical analysis that “the trend is your friend,” the odds favor further upside for the yellow metal in line with the dominant long-, medium-, and short-term uptrends.

XAU/USD Daily Chart

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

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

If a correction develops, firm support lies at $2,600 (September 18 high), $2,550 and $2,544 (.382 Fib retracement of the September rally).