Gold (XAU/USD) posted gains of around 0.50% on Wednesday as the Federal Reserve cut interest rates by 25 basis points as expected, in a split vote of 9 to 3, followed by Chairman Jerome Powell’s press conference, in which he took a neutral stance. The XAU/USD pair is trading at $4,227 after bouncing from daily lows of $4,182.
Fed rate cut by 25 basis points lifts gold; Powell indicates cautious optimism
Earlier, the Fed cut interest rates by 25 basis points with three opponents, including Governor Steven Meiran, who chose to cut interest rates by 50 basis points. Two regional Fed presidents, Jeffrey Schmid and Austin Goolsbee, voted to keep interest rates steady.
The monetary policy statement was virtually unchanged, highlighting that employment risks are tilted to the downside, while inflationary pressures continue to remain high. Fed Chairman Jerome Powell acknowledged this in his press conference, saying there is a tension between the central bank’s dual mandate.
Daily summary of market drivers: Gold rises amid dovish stance from the Federal Reserve
- US Treasury bond yields fell, with the benchmark 10-year interest rate falling by three and a half points to 4.155%. US real yields, which are inversely related to gold prices, fell by three and a half points to 1.895%, representing a strong boost for bullion.
- The US Dollar Index (DXY), which measures the greenback’s performance against a basket of six peers, fell 0.58% to 98.65.
- Federal Reserve Chair Jerome Powell said the central bank is “well positioned” to “wait and see” how the economy develops, after easing policy by 75 basis points this year. He added that the federal funds rate is within the upper range of neutrality estimates and that they will wait for economic data that may be “distorted.”
- After the 175 basis point cuts, “we’ve moved our policy back to where it’s certainly not too restrictive at this point,” Powell said. “I think it’s kind of in the range of neutrality.”
- The Summary of Economic Expectations (SEP) revealed a “chart point” that showed most members hinted that next year’s federal funds rates will be at around 3.4%, implying that policymakers may cut 25 basis points next year. In the long term beyond 2028, Fed policymakers see interest rates as neutral at around 3%.
Technical Analysis: Gold is hovering around the $4,200 level amid a lackluster session
The technical picture for gold suggests that the uptrend may continue, but a slightly hawkish Fed may push traders to sell the yellow metal below the $4,200 level. Although momentum remains bullish, as indicated by the Relative Strength Index (RSI), downside risks for bullion remain.
If the XAU/USD pair falls below $4,200, the next support will be the 20-day simple moving average (SMA) at $4,153, followed by the 50-day SMA at $4,090 and the $4,000 mark. On the other hand, if the Fed is dovish, the price of gold could rise towards $4,300 before reaching a record high of $4,381.
Frequently asked questions about gold
Gold has played a major role in human history as it has been widely used as a store of value and a medium of exchange. Currently, apart from its luster and use in jewellery, the precious metal is widely viewed as a safe haven asset, meaning it is a good investment during turbulent times. Gold is also widely viewed as a hedge against inflation and currency depreciation because it is not dependent on any specific issuer or government.
Central banks are the largest holders of gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase gold to improve the perceived strength of the economy and the currency. High gold reserves can be a source of confidence for a country’s solvency. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse relationship with the US dollar and US Treasuries, which are major reserve assets and safe havens. When the value of the dollar declines, 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 rise in the stock market tends to weaken the price of gold, while a sell-off in riskier markets tends to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession could cause the price of gold to rise rapidly due to its safe-haven status. As a lower-yielding asset, gold tends to rise as interest rates fall, while a higher cost of money usually negatively impacts the yellow metal. However, most of the moves depend on how the US Dollar (USD) behaves as the asset is priced in Dollars (XAU/USD). A stronger dollar tends to keep the price of gold in check, while a weaker dollar is likely to push gold prices higher.
