Gold record setting run remains uninterrupted as trade tensions offset positive risk tone
- Gold attracts safe-haven flows amid fresh US-China trade tensions and geopolitical risks.
- Bets for more rate cuts by the Fed offset a modest USD strength and benefit the commodity.
- The fundamental backdrop favors the XAU/USD bulls despite still overbought conditions.
Gold (XAU/USD) stands firm near an all-time peak during the first half of the European session on Monday and seems poised to appreciate further amid a supportive fundamental backdrop. Investors now seem worried that a prolonged US government shutdown will affect the economic performance. Adding to this, fresh US-China trade tensions and persistent geopolitical risks stemming from the protracted Russia-Ukraine war push the safe-haven precious metal higher for the second straight day.
Meanwhile, US President Donald Trump's pivot on 100% China tariff eases market fears of a worsening trade conflict between the world's two largest economies and triggers a fresh wave of the global risk-on trade. This, however, does little to dent the prevalent bullish sentiment surrounding the Gold. Furthermore, the growing acceptance that the US Federal Reserve (Fed) will cut interest rates two more times this year offsets a modest US Dollar (USD) and benefits the non-yielding yellow metal.
Daily Digest Market Movers: Gold buying remains unabated despite positive risk tone, USD uptick
- The global risk sentiment took a turn for the worse on Friday after US President Donald Trump threatened an additional tariff of 100% on Chinese exports and announced new export controls on critical software effective November 1. In response, China accuses the US of double standards over the tariff threat and said that it could introduce its own unspecified countermeasures if the US president carries out his threat, adding that it was not afraid of a possible trade war.
- Trump, however, softened his stance over the weekend and posted on Truth Social that the US does not wish to hurt China. Trump added further that China’s economy will be fine and that both countries wish to avoid economic pain. Nevertheless, the escalating rhetoric fuels uncertainty over a potential meeting between Trump and Chinese President Xi Jinping later this year, pushing the Gold price to a fresh all-time peak during the Asian session on Monday.
- The US government shutdown is on track to extend into a third week as Congress remains deadlocked on a funding plan. Moreover, the Senate isn’t scheduled to hold any votes until Tuesday afternoon. Top House leaders signaled that there is virtually no appetite for their parties to cross the aisle and engage with the other side’s demands. Trump blamed Democrats for his decision to lay off thousands of federal employees, who began receiving notices on Friday.
- Trump, while aboard Air Force One, warned that he may send long-range Tomahawk missiles that could be used by Ukraine if Russia doesn’t settle the war soon. Trump added that the missiles would act as a new step of aggression if introduced in the Russia-Ukraine war. Russia has cautioned against Ukraine being provided with Tomahawk missiles. This keeps geopolitical risks in play and turns out to be another factor driving flows towards the safe-haven precious metal.
- According to the CME FedWatch tool, the possibility of a 25-basis-point interest rate cut by the Fed in October and December stands at around 96% and 87%, respectively. This, in turn, backs the case for a further appreciating move for the non-yielding yellow metal amid the lack of any US Dollar buying interest and relatively thin liquidity on the back of a bank holiday in the US.
Gold bulls not ready to give up yet despite extremely overbought conditions on short-term charts
Friday's bounce from the vicinity of a three-week-old ascending trend line support and the subsequent move up favor the XAU/USD bulls. However, still overbought conditions on short-term charts make it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further gains.
Meanwhile, any corrective slide below the $4,020-4,018 area is more likely to attract fresh buyers near the $4,000 psychological mark. This should help limit the downside for the Gold price near the aforementioned trend line support, currently pegged near the $3,965-3,964 area. A convincing break below the latter, however, might prompt some technical selling and pave the way for a fall towards the $3,900 round figure.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
