Gold price steadies on firm Fed rate-cut bets, Middle East conflicts

• Gold price hovers above $2,400 and sees more upside on multiple tailwinds.

• The Fed is expected to cut interest rates by more than 100 bps this year.

• Investors worry that the US could face a recession.

Gold price (XAU/USD) holds key ground at $2,400 as the US Dollar (USD) and bond yields give up some of their gains in Tuesday’s European session. The precious metal gains while investors look for fresh cues, which could clarify whether the United States (US) enters a recession. Also, market participants await signals about how much the Federal Reserve (Fed) will reduce interest rates this year.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, climbs to near 103.00 after recovering from more than a six-month low near 102.15. The 10-year US Treasury yields surrender some of its gains but hold above 3.86%. Historically, higher yields on interest-bearing assets reduce the opportunity cost of non-yielding assets, such as Gold.

Meanwhile, the overall outlook of the Gold price remains firm due to multiple tailwinds. Deepening Middle East tensions have improved the Gold’s appeal as a safe-haven asset. Market participants brace for a serious escalation in conflicts between Iran and Israel as the former launched dozens of missiles on Israeli territory on Saturday in retaliation to the assassination of Hamas leader Ismail Haniyeh by an Israeli airstrike in Tehran.

Daily digest market movers: Gold price rises as markets see sooner rate cuts by the Fed

• Gold price remains on a positive trajectory on firm speculation that fears of a US economic slowdown will bolster bulk rate cuts by the Fed. Fears of the US facing a recession were prompted by soft labor demand, a higher Unemployment Rate, and contracting activities in the manufacturing sector.

• The signal that confirms a technical recession is two consecutive declines in the nation’s Gross Domestic Product (GDP). The US economy performed strongly in the first half of this year. In the second quarter, the economy expanded by 2.8% on an annualized basis, double the growth rate recorded in the first quarter.

• Meanwhile, a faster-than-expected expansion in the US ISM Services Purchasing Managers Index (PMI) has also diminished recession fears. Commenting on the Services PMI performance, Chris Williamson, chief business economist at S&P Global Market Intelligence said, “The July surveys are indicative of the economy continuing to grow at the start of the third quarter at a rate comparable to GDP rising at a solid annualized 2.2% pace."

• According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows traders see a 50-basis point (bp) cut in interest rates in September as imminent. The data also shows that the Fed is expected to reduce its key borrowing rates by more than 100 bps this year.

• The expectations of sooner rate cuts have also been bolstered by Fed officials’ dovish outlook on interest rates. On Monday, comments from Chicago Federal Bank President Austan Goolsbee, in an interview on CNBC’s "Squawk Box" program, indicated that the central bank is prepared to respond to signs of economic weakness. Goolsbee said, “It doesn’t make sense to maintain a "restrictive" policy stance if the economy is softening,” Reuters reported.

Technical Analysis: Gold price hovers above $2,400

Gold price trades in a channel formation on a daily timeframe, which is slightly rising but broadly exhibited a sideways performance for more than three months. The 50-day Exponential Moving Average (EMA) near $2,370 continues to provide support to the Gold price bulls. 

The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting indecisiveness among market participants.

A fresh upside would appear if the Gold price breaks above its all-time high of $2,483.75, which will send it into unchartered territory.

On the downside, the upward-sloping trendline at $2,225, plotted from the October 6 low near $1,810.50, will be a major support in the longer term.

Gold FAQs

Why do people invest in Gold?

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.

Who buys the most Gold?

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.

How is Gold correlated with other assets?

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.

What does the price of Gold depend on?

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.