Gold pulls back after new high on China stimulus, dovish Fed bets
- Gold pulls back from a record high after China offloads stimulus and cuts interest rates.
- Continued bets that the Fed will make another jumbo cut before year-end also fuel the rally.
- Increased conflict in the Middle East threatens to escalate into all-out war, driving safety flows.
Gold (XAU/USD) pulls back on Tuesday after breaking above its previous all-time high to reach a new record of $2.640 per troy ounce. Market bets of more aggressive interest rate cuts from the Federal Reserve (Fed) are a major driver. The news of a big stimulus push in China, which includes interest rate cuts, is also a factor. Meanwhile, escalating geopolitical tensions in the Middle East are increasing safe-haven flows into the yellow metal.
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.
Gold hit new highs as market foresees more cuts coming
Gold peaked as market-based probabilities of the Fed making another double dose 50 basis points (bps), or 0.50%, rate cut remain high. The chances of such a cut at the meeting in November currently stand at 50.2% versus 49.8% for a 25 bps cut, according to the CME FedWatch tool.
On Monday, Fed Bank of Atlanta President Raphael Bostic – a voting member – was relatively neutral in comments about the policy, scoring a 4.0 on FXStreet’s FedTracker, which gauges the tone of Fed officials’ speeches on a dovish-to-hawkish scale from 0 to 10, using a custom AI model.
Non-voting Fed Bank of Atlanta President Austan Goolsbee struck a much more dovish tone, saying inflation had “come way down” and there would be “many more” cuts on their way. His comments scored a 2.0 on FXStreet’s FedTracker.
Fed Bank of Minneapolis President Neel Kashkari (non-voting member) was neutral, scoring a 3.6 on the FedTracker.
On Tuesday, Federal Reserve Governor Michelle Bowman (voter - hawkish) adopted a hawkish tone during her speech about the US economic outlook and monetary policy at the Kentucky Bankers Association Annual Convention. Bowman said, "with no clear signs of material weakening or fragility, in my view, beginning the rate-cutting cycle with a 1/4 percentage point move would have better reinforced the strength in economic conditions." Her comments scored a 7.0 on FXStreet’s FedTracker.
Gold helped by stimulus dump from People’s Bank of China
Gold rallies after the People’s Bank of China (PBoC) announced the largest stimulus package since the Covid pandemic on Tuesday. The PBoC is seeking to combat deflation and support the economy to reach its official yearly growth target of roughly 5.0%.
“The broader-than-expected package offering more funding and interest rate cuts marks the latest attempt by policymakers to restore confidence in the world's second-largest economy after a slew of disappointing data raised concerns of a prolonged structural slowdown,” said Reuters.
The PBoC said it would cut the seven-day reverse repo rate, its new benchmark, by 20 basis points to 1.5%, its medium-term lending facility by 30 bps to 2.30%, and the five and one-year prime rates by 25-30 bps.
PBoC Governor Pan Gongsheng also announced that the central bank will soon cut the amount of cash that banks must hold as reserves - known as reserve requirement ratios (RRR) - by 50 bps. This is likely to free up about 1 trillion yuan ($142 billion) for new lending, according to Reuters.
Pan further added that depending on the market liquidity situation later this year, the RRR may be further lowered by between 25 and 50 bps.
As a country, China constitutes Gold’s largest market.
Middle East tensions rise supporting safe-haven flows
Israel ramped up its bombing of Hezbollah targets in Lebanon overnight, causing over 492 deaths, many of them women and children, according to the BBC.
Hezbollah retaliated by bombing military targets in Northern Israel.
Gold could rise further if the situation escalates into a full-scale conflict. In terms of what such an escalation might look like, BBC International Editor Jeremy Bowan offers an interpretation.
“..some kind of ground operation involving (Israel) sending tanks and troops into Lebanon. And that, I think, then goes into a very escalatory and dangerous situation”, Bowan said.
Technical Analysis: Gold reaches new high of $2,640
Gold breaks to new highs on Tuesday. Given the principle in technical analysis that “the trend is your friend,” the odds favor even more upside for the yellow metal in line with the dominant long, medium, and short-term uptrends.
XAU/USD Daily Chart
The next targets to the upside are the 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 exits overbought, it will be a sign for them to close long positions and sell shorts, as it would suggest a deeper correction is in the process of unfolding.
If a correction evolves, firm support lies at $2,600 (September 18 high), $2,550 and $2,544 (0.382 Fibonacci retracement of the September rally).
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Author
Joaquin Monfort
FXStreet
Joaquin Monfort is a financial writer and analyst with over 10 years experience writing about financial markets and alt data. He holds a degree in Anthropology from London University and a Diploma in Technical analysis.
