Gold holds gains on bets of more Fed cuts, Middle East tensions

• Gold is continuing its uptrend as markets continue to price in more interest rate cuts from the Fed. 
• Such cuts would make Gold, a non-yielding asset, more attractive. 
• Rising tensions between Israel and Lebanon push up haven demand for the precious metal. 

Gold (XAU/USD) slightly retraces during the European session on Monday after being pushed up to a new all-time-high (ATH) of $2,631 earlier in the day, as markets continue to price in more aggressive interest rate cuts from the Federal Reserve (Fed) whilst rising geopolitical tensions stemming from the Middle East increase safe-haven demand for the precious metal. 

In regard to Fed rate cuts, lower interest rates are positive for Gold, as they reduce the opportunity cost of holding the non-interest-paying asset, making it more attractive to investors.

As such, the decision by the People’s Bank of China (PboC) to lower its 14-day reverse repo rate by 10 basis points (bps) to 1.85% early Monday, as well as inject additional liquidity into the financial system, probably further added to the attractiveness of Gold.

Gold hits new highs as market foresees more cuts coming

Gold rallies to new ATHs on Monday as markets price in the possibility of another double-dose interest rate cut from the Federal Reserve before Christmas. The chances of the Fed reducing interest rates by 50 bps (0.50%) again at the next meeting in November currently stand at 51.6% versus 48.4% for a 25 bps cut, according to the CME FedWatch tool. 

Recent commentary from Federal Reserve (Fed) Bank of Philadelphia Patrick Harker (voting member) late Friday suggested that whilst the labor market might be softening, there was a risk “the inflation decline could stall”.  His comments scored a 5.8 on FXStreet’s FedTracker, which gauges the tone of Fed officials’ speeches on a dovish-to-hawkish scale from 0 to 10 using a custom AI model.

The week ahead sees more commentary from Fed members, which could impact expectations regarding Fed policy and the price of Gold: 

• On Monday, Fed Bank of Atlanta President Raphael Bostic (voter – dovish) opens up proceedings, followed by Fed Bank of Chicago President Austan Goolsbee (non-voter – dovish), who “may give indications that he is looking for a continuation of large rate reductions” according to Jim Reid, Deutsche Bank’s Head of Macro Research. Later in the day, Federal Reserve Bank of Minneapolis President Neel Kashkari is also scheduled to speak.
   
• On Tuesday, Federal Reserve Governor Michelle Bowman (voter – hawkish) delivers a speech about the US economic outlook and monetary policy at the Kentucky Bankers Association Annual Convention.
   
• Fed Member of the Board of Governors Adriana Kugler (voter – neutral) speaks on Wednesday and then takes part in a fireside chat with President of the Fed Bank of Boston Susan Collins (non-voter – dovish) on Thursday.
   
• Also on Thursday, Fed Member of the Board of Governors Michelle Bowman will speak – she was the first governor to dissent at an FOMC since 2005. On the same day, there is the tenth annual US Treasury Market Conference. Governor of the Fed Jerome Powell opens it up with pre-recorded remarks. 
   
• At the same conference, New York Fed President John Williams (voter – dovish) and Fed Vice Chair of Supervision Michael Barr (voter – dovish) will also speak.

UN warns of catastrophe in Middle East

The United Nations (UN) has warned that the Middle East is on the brink of a catastrophe as Israel and Lebanon inch closer to all-out war. 

Over the weekend, Israel struck targets in Lebanon and Hezbollah retaliated with rocket strikes in northern Israel. It is possible Israel could mount a ground invasion of Lebanon, escalating the war further. Such an event would probably push up the price of Gold. 

“If Hezbollah does not buckle, which I don’t think they will because fighting Israel is deep in their DNA, Israel has said they will ‘do more’,” says Jeremy Bowan, International Editor at the BBC. “That might be some kind of ground operation involving sending tanks and troops into Lebanon. And that, I think, then goes into a very escalatory and dangerous situation”, Bowan added.

Technical Analysis: Gold’s uptrend extends

Gold extends its uptrend, pushing to new record highs on Monday. Given the principle in technical analysis that “the trend is your friend,” the odds favor more upside for the yellow metal in line with the dominant long, medium, and short-term uptrends. 

XAU/USD Daily Chart

The next targets to the upside are the round numbers: $2,650 first and then $2,700. 

Gold entered overbought levels, according to the Relative Strength Index (RSI), on Friday. This advises traders not to add to their long positions. If Gold exits overbought, it will be a sign for them to close long positions and sell shorts, as it would suggest a deeper correction is in the process of unfolding.   

If a correction evolves, firm support lies at $2,600 (September 18 high), $2,550 and $2,544 (0.382 Fibonacci retracement of the September rally).