Gold looks to extend record-setting run beyond $3,950 amid Fed rate cut bets

Gold hits a fresh all-time high on Monday amid a supportive fundamental backdrop.
Fed rate cut bets and the US government shutdown underpin the precious metal.
Bulls shrug off a firmer USD, the risk-on environment, and overbought conditions.

Haresh Menghani FXStreet

Gold (XAU/USD) continues scaling record highs through the first half of the European session on Monday and seems poised to appreciate further amid a supportive fundamental backdrop. The growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs two more times this year has been a key factor behind the non-yielding yellow metal's strong move up witnessed over the past seven weeks or so. Apart from this, worries that a prolonged US government shutdown could affect the economic performance underpin the safe-haven commodity amid persistent trade and geopolitical tensions.

Meanwhile, Sanae Takaichi's win as the leader of Japan's ruling Liberal Democratic Party (LDP) raises the chance that the Bank of Japan (BoJ) would delay raising interest rates further. This, in turn, prompts heavy selling around the Japanese Yen (JPY), which, in turn, provides a strong boost to the US Dollar (USD), though it does little to dent the underlying strong bullish sentiment surrounding the Gold price. Even the prevalent risk-on environment, which tends to undermine the safe-haven commodity, fails to hinder the ongoing positive momentum. This, in turn, suggests that the path of least resistance for the XAU/USD pair remains to the upside and backs the case for an extension of the recent well-established uptrend.

Daily Digest Market Movers: Gold uptrend remains uninterrupted amid Fed rate cut bets, safe-haven demand

According to the CME FedWatch tool, the possibility of a 25-basis-point interest rate cut by the US Federal Reserve in October and December stands at 95% and 83%, respectively. This has been a key factor fueling the record-setting rally in the non-yielding Gold since early September.
The White House may resort to mass layoffs of federal workers if US President Donald Trump concludes that negotiations with congressional Democrats to end a partial government shutdown have reached a dead end. This adds a layer of uncertainty and benefits the safe-haven commodity.
Sanae Takaichi's election as the leader of Japan's Liberal Democratic Party in a run-off election held on Saturday raised the chances that the Bank of Japan will avoid raising interest rates this month. This, in turn, provides an additional boost to the XAU/USD pair and contributes to the move up.
Meanwhile, expectations for more expansionary economic policies weigh heavily on the Japanese Yen, which, in turn, provides a strong lift to the US Dollar. This, along with the upbeat market mood, could act as a headwind for the safe-haven precious metal amid still overbought conditions.
Important US macro releases scheduled at the beginning of a new month have been delayed due to the US government closure. Nevertheless, speeches from influential FOMC members could drive the USD and provide short-term impetus to the commodity later during the US session.
On the geopolitical front, Russia launched yet another barrage of missiles and drones against Ukraine on Sunday. Ukraine's President Volodymyr Zelenskyy said that the overnight attack saw over 50 missiles and about 500 attack drones fired from Russia towards his country.
US President Donald Trump on Monday urged Israel and Hamas to "move fast" on the Gaza peace plan, warning that failure to do so may lead to "massive bloodshed". This keeps geopolitical risks in play and suggests that the path of least resistance for the commodity is to the upside.

Gold seem unaffected by overbought conditions, bulls not ready to give up yet

From a technical perspective, Monday's strong move up beyond the $3,900 mark could be seen as a fresh trigger for the XAU/USD bulls and validates the near-term positive outlook. However, the daily Relative Strength Index (RSI) is holding well above the 70 mark and flashing overbought conditions, warranting some caution before positioning for any further gains.

On the flip side, any corrective pullback might now be seen as a buying opportunity and remain limited near the $3,900-3,895 region. A convincing break below might prompt some technical selling and drag the Gold price to the near relevant support near the $3,865-3,863 area, or the 100-hour Simple Moving Average (SMA). The latter nears an ascending trend-line extending from sub-$3,800 levels touched last Tuesday and should act as a key pivotal point.

Gold FAQs

Why do people invest in Gold?

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.

Who buys the most Gold?

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.

How is Gold correlated with other assets?

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.

What does the price of Gold depend on?

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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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