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Gold price drifts lower amid the upbeat market mood, bullish potential seems intact

  • Gold price attracts some sellers for the second straight day, though the downside seems limited.
  • The optimism over China’s stimulus measures drives some haven flows away from the XAU/USD.
  • Geopolitical risks and bets for a more aggressive policy easing by the Fed could limit losses for the precious metal.

Gold price (XAU/USD) kicks off the new week on a softer note, albeit it remains confined in a multi-day-old range and within striking distance of the all-time peak touched last Thursday. Israel intensified the war at its border with Lebanon, raising the risk of a further escalation of geopolitical tensions in the Middle East. Apart from this, news that Japan’s new Prime Minister Shigeru Ishiba is planning a general election for October 27, along with the US political uncertainty, should lend support to the safe-haven precious metal.

Furthermore, dovish Federal Reserve (Fed) expectations keep the US Dollar (USD) bulls on the defensive, near the lowest level since July 2023 touched on Friday, and might turn out to be another factor acting as a tailwind for the non-yielding Gold price. That said, the risk-on environment, bolstered by additional stimulus announced by China over the weekend, is seen exerting some pressure on the XAU/USD for the second straight day. Nevertheless, the fundamental backdrop supports prospects for the emergence of some dip-buying. 

Daily Digest Market Movers: Gold price is undermined by the risk-on mood, Fed rate cut bets and geopolitics could limit deeper losses

  • Israel expanded its confrontation with Iran’s allies – Houthis in Yemen and Hezbollah in Lebanon – and launched aggressive aerial assaults on Sunday, fueling fears about an all-out war in the Middle East.
  • According to a statement by the Israeli Defence Forces dozens of aircraft, including fighter jets, power plants and a seaport at the Ras Issa and Hodeidah ports in Yemen were targeted in the airstrikes.
  • Israeli airstrikes across Lebanon killed the deputy head of the militant group Hezbollah’s Central Council, Nabil Kaouk, making him the seventh leader slain in Israeli attacks in a little over a week. 
  • Investors now seem concerned that the fighting could spin out of control and draw in Iran and the United States, Israel’s main ally, which, in turn, should act as a tailwind for the safe-haven Gold price. 
  • The current market pricing indicates a greater chance that the US Federal Reserve will again lower borrowing costs by 50 basis points for the second straight monetary policy meeting in November. 
  • Dovish Fed expectations fail to assist the US Dollar to register any meaningful recovery from its lowest level since July 2023 and should contribute to limiting losses for the non-yielding yellow metal. 
  • St. Louis Fed President Alberto Musalem said on Friday that the US central bank should revert to cutting interest rates gradually after a larger-than-usual half-point reduction in the September meeting.
  • The global risk sentiment gets an additional boost after the People’s Bank of China announced on Sunday that it would tell banks to lower mortgage rates for existing home loans by October 31.
  • This comes on top of last week’s slew of monetary, fiscal and liquidity support measures – China’s biggest stimulus package since the pandemic – and remains supportive of the upbeat mood. 
  • China’s official Manufacturing PMI improved to 49.8 in September from 49.1, beating estimates of 49.5, while the NBS Non-Manufacturing PMI unexpectedly fell to 50.0 from August’s 50.3 figure.
  • China’s Caixin Manufacturing PMI contracted to 49.3 in September, from 50.4 in the previous month, and the Caixin Services PMI dropped to 50.3 during the reported month from 51.6 in August.
  • Meanwhile, the upbeat mood is seen exerting some downward pressure on the safe-haven precious metal as traders now look to Fed Chair Jerome Powell’s speech for some meaningful impetus.

Technical Outlook: Gold price could attract dip-buyers near an ascending trend-channel throwback

From a technical perspective, any subsequent fall is likely to find decent support near a short-term ascending trend-channel resistance breakpoint, around the $2,625 region. This is followed by the $2,600 mark, which if broken decisively could pave the way for some meaningful downside in the near term. Given that the Relative Strength Index (RSI) on the daily chart is still hovering near the overbought zone, the Gold price might then accelerate the slide towards the $2,560 intermediate support en route to the $2,535-2,530 region.

On the flip side, the $2,670-2,671 area now seems to act as an immediate hurdle ahead of the $2,685-2,686 zone, or the record high touched last Thursday. This is closely followed by the $2,700 round figure, which if conquered will be seen as a fresh trigger for bullish traders and set the stage for an extension of a multi-month-old uptrend.

Gold FAQs

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.

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.

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.

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.