Gold prices have reached new all-time highs above $2,600, fueled by expectations of further rate cuts by the Federal Reserve and escalating tension between Israel and Hezbollah in the Middle East. The XAU/USD currently trades at $2,621, marking a 1.37% increase in value. Risk aversion is evident as Wall Street indices post losses, with Fed Governor Christopher Waller supporting a 50 basis points rate cut due to anticipated low PCE Price Index in August.
The correlation between US Treasury yields, Gold prices, and the US Dollar is not having a significant impact. While the US 10-year Treasury note yields have increased to 3.726%, the US Dollar Index has risen by 0.08% to 100.71. Additional Fed speakers, including Michelle Bowman, who dissented to a 50 bps cut, have influenced gold’s trajectory in the absence of significant economic data in the US. Bowman preferred a smaller cut to mitigate risks associated with inflation declaration.
Looking ahead, upcoming Fed speakers and economic data releases will play a crucial role in determining the future path of XAU/USD. The market will closely monitor the S&P Global Flash PMIs, housing data, and the Core PCE Price Index to gauge the impact on gold prices. The Fed’s Summary of Economic Projections indicates projections for interest rates to reach 4.4% in 2024 and 3.4% in 2025, with inflation expected to meet the 2% target by 2026.
Gold’s rally continues due to overall weakness in the US Dollar and heightened tensions in the Middle East. Bullion prices experienced a 27% increase in 2024, being the largest annual rise since 2010. The physical demand for Gold from China and India has overshadowed inflows into Gold-backed ETFs. Looking ahead, the US economy is projected to grow at a 2% pace in 2024, with the Unemployment Rate forecasted to rise to 4.4% by the year-end. December 2024 fed funds rate futures contracting suggest at least a 53 bps rate cut by the Fed.
From a technical perspective, Gold’s uptrend remains strong, hitting record highs above $2,600. However, the rally appears overextended, which could lead to a pullback before aiming for new highs. Momentum favors buyers, with the RSI pointing upwards in bullish territory. The resistance levels for XAU/USD are forecasted to be $2,650 and $2,700, with support levels at $2,600 and $2,546. The future direction of Gold prices will be influenced by upcoming economic data releases and speeches by Fed officials.
Gold’s historical significance as a store of value and medium of exchange has been well-documented. Currently, Gold is considered a safe-haven asset, a hedge against inflation, and currency depreciation. Central banks are major holders of Gold, acquiring substantial reserves to enhance the perceived strength of their economies and currencies. In 2022, central banks added 1,136 tonnes of Gold to their reserves, the highest yearly purchase on record, with emerging economies like China and India increasing their reserves significantly.
Gold has an inverse relationship with the US Dollar and US Treasuries, major safe-haven assets. Geopolitical unrest, fears of recession, and fluctuations in interest rates can influence Gold prices. Despite being a yield-less asset, Gold tends to rise with lower interest rates and falls with higher rates. The performance of the US Dollar plays a crucial role in determining the direction of Gold prices, as the asset is priced in dollars. Overall, Gold’s price movement is influenced by a combination of factors, including geopolitical events, economic data, and currency movements.
