Gold Extends to New High Amid China Stimulus and Fed Rate Cut Expectations
Gold has surged to a new record high, driven by a combination of factors, including China’s significant economic stimulus measures, expectations of further interest rate cuts by the Federal Reserve, and escalating geopolitical tensions in the Middle East. On Tuesday, gold (XAU/USD) broke through its previous all-time high, reaching an unprecedented $2,640 per troy ounce.
Fed Rate Cut Expectations Drive Gold’s Rally
One of the primary factors fueling gold’s rally is the market’s anticipation of more aggressive interest rate cuts by the Federal Reserve (Fed). The possibility of a substantial 50 basis points (bps) rate cut by the Fed has gained traction, with the probability of such a cut in November currently standing at 50.2%, according to the CME FedWatch tool. This expectation is driving investors to seek safety in gold, a non-interest-bearing asset, as lower interest rates reduce the opportunity cost of holding it.
Comments from various Federal Reserve officials have further influenced market sentiment. For instance, on Monday, Fed Bank of Atlanta President Raphael Bostic, a voting member, adopted a neutral stance on monetary policy, offering little guidance on the Fed’s future actions. In contrast, Fed Bank of Chicago President Austan Goolsbee, a non-voting member, struck a decidedly dovish tone, noting that inflation had “come way down” and suggesting that there would be “many more” rate cuts on the horizon. Similarly, Fed Bank of Minneapolis President Neel Kashkari, another non-voting member, remained neutral in his comments. The market will closely watch Federal Reserve Governor Michelle Bowman’s upcoming speech on Tuesday for further insights into the Fed’s stance on the U.S. economic outlook and monetary policy.
China’s Stimulus Boosts Gold’s Appeal
Gold’s rally was also bolstered by China’s announcement of its largest economic stimulus package since the COVID-19 pandemic. The People’s Bank of China (PBoC) unveiled a comprehensive set of measures designed to combat deflation and support the economy in achieving its annual growth target of approximately 5.0%.
The stimulus package includes a series of interest rate cuts, with the PBoC reducing its seven-day reverse repo rate, now the new benchmark, by 20 basis points to 1.5%. Additionally, the medium-term lending facility rate was lowered by 30 bps to 2.30%, and the one-year and five-year prime rates were cut by 25-30 bps. These measures are aimed at restoring confidence in the world’s second-largest economy, which has been struggling with a series of disappointing economic data points that raised concerns about a prolonged structural slowdown.
Furthermore, PBoC Governor Pan Gongsheng announced plans to reduce the reserve requirement ratio (RRR) by 50 bps, potentially freeing up about 1 trillion yuan ($142 billion) for new lending. Pan also hinted that the RRR might be further lowered by an additional 25 to 50 bps later this year, depending on market liquidity conditions. As China is the largest gold market globally, these measures are expected to significantly boost demand for the yellow metal, further supporting its price.
Geopolitical Tensions in the Middle East Fuel Safe-Haven Flows
The escalating conflict in the Middle East is another critical factor driving safe-haven flows into gold. Israel has intensified its bombing of Hezbollah targets in Lebanon, leading to over 492 deaths, many of whom were women and children, according to the BBC. In retaliation, Hezbollah has launched attacks on military targets in Northern Israel.
The situation is becoming increasingly volatile, and experts warn that it could escalate into a full-scale conflict. BBC International Editor Jeremy Bowen suggested that the problem might involve Israel sending tanks and troops into Lebanon, which would mark a significant escalation and potentially draw in other regional powers. If this scenario unfolds, it could trigger further safe-haven flows into gold, pushing its price even higher.
Technical Analysis: Gold Surges to $2,640
From a technical perspective, gold’s breakout to new highs on Tuesday signals the continuation of its strong uptrend across long, medium, and short-term timeframes. The “the trend is your friend” principle suggests that the odds favor further upside for gold. The next key resistance levels to watch are the round numbers at $2,650 and $2,700.
However, traders should be cautious, as gold has entered overbought territory according to the Relative Strength Index (RSI) on Friday. This overbought condition advises against adding to long positions, as it indicates that a potential correction may be on the horizon. If gold exits the overbought zone, it could signal the start of a deeper correction, with traders likely to close long positions and initiate short positions.
In the event of a correction, gold may find firm support at $2,600, which corresponds to the high reached on September 18, followed by additional support at $2,550 and $2,544, the latter being the 0.382 Fibonacci retracement level of the September rally.
Gold’s new record high of $2,640 per troy ounce results from a confluence of factors, including China’s significant stimulus measures, expectations of aggressive interest rate cuts by the Fed, and escalating geopolitical tensions in the Middle East. While the technical outlook suggests that gold could continue to rise, traders should be mindful of the potential for a correction, particularly given the metal’s overbought condition. As global economic and political uncertainties persist, gold is likely to remain a favored safe-haven asset for investors.
