The price of gold (XAU/USD) rose to an all-time high near $4,300 during early European trading hours on Monday. The precious metal is gaining momentum amid expectations of an interest rate cut by the US Federal Reserve following signs of weak US inflation and cold jobs reports. Lower interest rates can reduce the opportunity cost of holding gold, supporting the non-yielding precious metal.
In addition, the continued demand for safe havens amid the Israeli-Iran conflict and escalating tensions between the United States and Venezuela may contribute to the bullish trend for the yellow metal. It should be noted that traders look for assets that can maintain their value during periods of uncertainty, which supports the price of gold.
Financial markets are likely to trade in a subdued mood, and traders may take profits ahead of the long holiday period. This, in turn, may limit the precious metal’s upside. The US Chicago Fed’s National Activity Index report for September will be published later on Monday. On Tuesday, the preliminary US GDP reading for the third quarter (Q3) will be in the spotlight.
Daily Summary Market Drivers: Gold rises amid Fed rate cut expectations, safe haven flows
- The United States is still pursuing a third oil tanker near Venezuela, officials told Reuters on Sunday, as US President Donald Trump tightens an oil blockade of Nicolas Maduro’s government.
- Israeli Prime Minister Benjamin Netanyahu said over the weekend that officials are preparing to brief US President Donald Trump on options for attacking Iran again, according to Reuters.
- The final reading from the University of Michigan on Friday showed that the Consumer Confidence Index was revised down to 52.9 in December from an initial reading of 53.3. Economists had expected the index to be revised upward to 53.4.
- Cleveland Fed President Beth Hammack said Sunday that monetary policy is well positioned to pause, and she will evaluate the effects of 75 basis point interest rate cuts on the economy during the first quarter, according to Bloomberg.
- Financial markets expect just a 21.0% chance of the Fed cutting interest rates at its next meeting in January, after it cut them by a quarter point at each of its last three meetings, according to the CME FedWatch tool.
Gold remains bullish and poised to challenge record highs
Gold is trading in positive territory during the day. According to the four-hour chart, the yellow metal maintains a bullish outlook, as the price has good support above the key 100-period EMA. Moreover, the Bollinger band is widening and the 14-day RSI is above its midline, keeping the bulls in check.
The immediate resistance level for XAU/USD is seen at an all-time high of $4,381. A clear break above this level could send gold rising towards the psychological level at $4,400.
On the flip side, continued trading below the December 20 low at $4,337 could trigger new selling pressure and pull the price to the lower bound of the Bollinger band at $4,307, followed by the 100-day moving average of $4,253.
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.
