Gold buying remains unabated; fresh record high and counting amid dovish Fed, geopolitical risks
- Gold continues to draw support from the Fed’s dovish signal and rising geopolitical tensions.
- The USD stalls its recovery from a multi-year low and further lends support to the commodity.
- A positive risk tone does little to dent the bullish sentiment surrounding the precious metal.
Gold (XAU/USD) sticks to its strong intraday gains comfortably above the $3,700 mark, or a record high, through the first half of the European session on Monday and seems poised to appreciate further amid a supportive fundamental backdrop. The US Federal Reserve's (Fed) dovish signal, indicating that two more rate cuts would follow through the end of this year, keeps a lid on the recent US Dollar (USD) recovery from a multi-year low and acts as a tailwind for the non-yielding yellow metal.
Apart from this, geopolitical risks stemming from the intensifying Russia-Ukraine war turn out to be another factor driving safe-haven flows towards Gold. Bulls, meanwhile, seem rather unaffected by a generally positive risk tone, which tends to undermine demand for the XAU/USD pair. This, in turn, suggests that the path of least resistance for the precious metal remains to the upside, though still overbought conditions warrant caution for bulls ahead of Fedspeak later today.
Daily Digest Market Movers: Gold bulls retain control as Fed's dovishness and geopolitical risks
- The Federal Reserve's dovish outlook continues to act as a tailwind for the non-yielding Gold, which remains within striking distance of the $3,700 mark and the all-time peak touched last week. The US central bank lowered its benchmark rate for the first time since December and indicated the need for two more rate cuts this year amid concerns about a softening US labor market.
- However, Fed Chair Jerome Powell said that risks to inflation are tilted to the upside and the move to lower interest rates was a risk management cut. Powell added that he doesn't feel the need to move quickly on rates and that the Fed is in a meeting-by-meeting situation regarding the outlook for interest rates. The outlook lifts the US Dollar to an over one-week high on Monday.
- Nevertheless, traders still believe that interest rates will drop much faster than the Fed is planning and are now betting on the possibility that the short-term rate, currently in the 4.00%-4.25% range, will fall under 3% by the end of 2026. Stock markets are riding this optimism to record highs, which contribute to capping the upside for the safe-haven precious metal during the Asian session.
- The US Supreme Court set a date of November 5 for arguments concerning the legality of President Donald Trump's sweeping global tariffs. A lower court ruled that Trump had overstepped his authority in imposing most of his tariffs under a federal law meant for emergencies. Trump's tariffs, however, remain in effect during the appeal to the Supreme Court and keep investors on edge.
- NATO forces intercepted three Russian MiG-31 fighters on Friday after they entered Estonia's airspace. Trump expressed his displeasure at the incursion and said he would help defend European Union members if Russia intensified hostilities. This keeps geopolitical risks in play, which could benefit the precious metal's safe-haven status and backs the case for additional gains.
- There isn't any relevant market-moving economic data due for release from the US on Monday. However, speeches from influential FOMC members, including Powell, might influence the USD price dynamics later during the North American session and produce short-term trading opportunities around the XAU/USD pair.
Gold uptrend remains uninterrupted despite still overbought RSI on the daily chart
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From a technical perspective, last week's rebound from a bullish flag pattern resistance breakpoint, around the $3,628 region, and the subsequent move up favor the XAU/USD bulls. That said, the daily Relative Strength Index (RSI) is still pointing to slightly overbought conditions and warrants some caution before positioning for any further gains. Hence, it will be prudent to wait for some near-term consolidation or a modest pullback before positioning for an extension of the recent well-established uptrend witnessed over the past month or so.
On the flip side, the $3,672-3,670 area now seems to protect the immediate downside. Any further corrective slide might still be seen as a buying opportunity and remain cushioned near the $3.628-3,626 resistance-turned-support. A convincing break below the latter, however, might prompt some technical selling and drag the Gold price to the $3,600 mark. The downfall could extend further towards the $3,563-3,562 support en route to the $3,511-3,510 region, which could act as a strong base for the XAU/USD pair.
(This story was corrected on September 22 at 04:48 GMT to say in the second bullet point that the USD prolongs its recovery from a multi-year low, not peak)
Gold FAQs
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.
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.
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.
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.
