Gold Supported by Bets on Fed Cuts and Rising Middle East Tensions

Introduction

Gold has been on an impressive uptrend, driven by expectations of more interest rate cuts from the Federal Reserve (Fed) and increasing geopolitical tensions in the Middle East. These factors have combined to push gold to new all-time highs, making it an attractive investment amid global uncertainty.

Gold’s All-Time High and Market Dynamics

Fed Rate Cuts Bolster Gold

Gold (XAU/USD) hit a new all-time high (ATH) of $2,631 earlier on Monday before slightly retracing. The precious metal’s rise is largely due to markets anticipating aggressive interest rate cuts by the Federal Reserve. The potential for such cuts makes gold, a non-yielding asset, more appealing to investors, as lower interest rates reduce the opportunity cost of holding it.

As markets price in these cuts, the attractiveness of gold increases, driving its value upward. Notably, the People’s Bank of China (PboC) contributed to this trend by lowering its 14-day reverse repo rate by 10 basis points (bps) to 1.85% and injecting additional liquidity into the financial system. This move likely added to gold’s allure, as it signaled a broader trend of easing monetary policies that could support higher gold prices.

Middle East Tensions Increase Safe-Haven Demand

Adding to the momentum, rising geopolitical tensions between Israel and Lebanon have heightened demand for gold as a safe-haven asset. Over the weekend, Israel launched strikes on targets in Lebanon, prompting retaliatory rocket strikes from Hezbollah. The situation has escalated, with the possibility of a full-scale ground invasion by Israel. Such a scenario would likely push gold prices even higher as investors seek refuge in safe-haven assets amidst global instability.

Gold’s Rally: The Role of Fed Policy Expectations

Market Pricing of Fed Rate Cuts

Gold’s rally to new ATHs is also fueled by market expectations of further rate cuts by the Federal Reserve. The CME FedWatch tool currently suggests a 51.6% chance of a 50 bps (0.50%) cut at the Fed’s next meeting in November, compared to a 48.4% probability of a smaller 25 bps cut. This indicates that investors are leaning towards the likelihood of more aggressive easing measures, which would continue to support gold’s uptrend.

Recent comments from Federal Reserve Bank of Philadelphia President Patrick Harker hinted at a potential softening in the labor market. However, Harker also warned that the decline in inflation could stall, leaving room for more rate cuts. These mixed signals have kept the market on edge, with gold benefiting as investors seek to hedge against economic uncertainties.

Upcoming Fed Member Speeches and Their Impact on Gold

The week ahead is crucial for shaping market expectations around Fed policy and, by extension, the price of gold. Several Fed members are scheduled to speak, and their comments could sway market sentiment:

• Monday: Fed Bank of Atlanta President Raphael Bostic (dovish) and Fed Bank of Chicago President Austan Goolsbee (dovish) will speak, with the latter potentially advocating for continued rate reductions.
• Tuesday: Federal Reserve Governor Michelle Bowman (hawkish) will discuss the US economic outlook and monetary policy at the Kentucky Bankers Association Annual Convention.
• Wednesday and Thursday: Fed Member of the Board of Governors Adriana Kugler (neutral) will speak, followed by a discussion with Fed Bank of Boston President Susan Collins (dovish).
• Thursday: Bowman will speak again, followed by the US Treasury Market Conference, where Fed Chair Jerome Powell, New York Fed President John Williams (dovish), and Fed Vice Chair of Supervision Michael Barr (dovish) will also present.

These speeches are expected to provide further insights into the Fed’s policy direction, which will likely influence gold prices.

UN Warning and Escalating Middle East Tensions

Potential Catastrophe in the Middle East

The United Nations (UN) has issued a warning that the Middle East is on the brink of a catastrophe as Israel and Lebanon inch closer to an all-out war. Israel’s recent strikes on Lebanon and Hezbollah’s retaliatory actions have escalated tensions, with the possibility of Israel launching a ground invasion of Lebanon. Such developments would likely drive gold prices higher, as investors flock to safe-haven assets amid growing geopolitical risks.

BBC International Editor Jeremy Bowan noted that Israel might be preparing for a more extensive ground operation involving tanks and troops in Lebanon, which could lead to a dangerous escalation of the conflict. This situation could further increase the demand for gold as a protective investment.

Technical Analysis: Gold’s Uptrend and Potential Corrections

Gold’s Uptrend Extends

From a technical perspective, gold’s uptrend shows no signs of slowing down, with the precious metal pushing to new record highs. The principle of “the trend is your friend” suggests that the odds favor further upside for gold, in line with the long, medium, and short-term uptrends.

Key Resistance Levels and Overbought Conditions

The round numbers at $2,650 and $2,700 are the next significant resistance levels for gold. However, it is important to note that gold entered overbought territory on Friday, as indicated by the Relative Strength Index (RSI). This condition suggests that traders should be cautious about adding to long positions at current levels. If gold exits overbought territory, it could signal the start of a deeper correction, prompting traders to close long positions and consider short positions.

Support Levels for Potential Corrections

If a correction does occur, gold has firm support at $2,600 (the high from September 18), followed by $2,550 and $2,544 (the 0.382 Fibonacci retracement level of the September rally). These levels could act as potential buy zones for traders looking to enter the market after a pullback.

Gold continues to be supported by a combination of factors, including expectations of further Fed rate cuts and rising geopolitical tensions in the Middle East. As these dynamics evolve, gold’s uptrend is likely to persist, with technical analysis suggesting further upside potential. However, traders should be mindful of overbought conditions and the possibility of a correction in the near term.