Gold prices have shown remarkable resilience, hovering close to their all-time high of around $3,650 during the European trading session on Friday. The robust performance is buoyed by strong expectations that the Federal Reserve (Fed) will announce interest rate cuts in its upcoming monetary policy meeting. Recent economic indicators have intensified these expectations, particularly with new concerns over the labor market emerging.
The recent labor market data has raised alarms, as the US Department of Labor reported that Initial Jobless Claims surged to 263,000 for the week ending September 5, marking the highest level in four years. In an environment characterized by growing labor market risks, traders are increasingly betting on a more dovish stance from the Fed. According to the CME FedWatch tool, there exists a 7.5% probability that the Fed could implement a more aggressive cut of 50 basis points, reducing the target range to 3.75%-4.00%. However, most analysts are leaning towards a standard cut of 25 basis points.
The interplay between interest rates and the appeal of non-yielding assets like gold is pivotal. Lower interest rates generally enhance the attractiveness of gold, as it does not offer a yield, making it more favorable compared to interest-bearing assets when the cost of borrowing is lower.
Adding to this bullish sentiment towards gold is the recent inflation data. The Consumer Price Index (CPI) report for August indicated that inflation increased at an annual rate of 2.9%, the highest since February, aligning with expectations. High inflation rates typically support gold prices, as the precious metal is perceived as a solid hedge against rising living costs and a depreciating currency.
Investors on Friday are focused on the preliminary results of the Michigan Consumer Sentiment Index and Consumer Inflation Expectations for September, which are set to be released at 14:00 GMT. These metrics could offer further clues about consumer confidence and inflationary expectations, impacting gold’s trajectory.
From a technical standpoint, gold has maintained its gains around the $3,650 mark. The upward-sloping 20-day Exponential Moving Average (EMA) currently rests near $3,517.70, indicating a sustained bullish trend. However, an overbought reading on the 14-day Relative Strength Index (RSI), which is hovering around 80.00, suggests that a corrective pullback could be in the offing.
Support for gold is pegged at the April 22 high of $3,500, while a resistance level to watch is the psychological barrier of $3,700.
Historically, gold has served as both a store of value and a medium of exchange, gaining renewed prominence in today’s economic climate. Beyond its ornamental value in jewelry, gold is considered a safe-haven asset, particularly during economic uncertainty. It acts as a hedge against inflation and currency depreciation, given that it is not tied to any government or financial institution.
Central banks are among the largest holders of gold, utilizing the asset to bolster their currencies and enhance economic stability. According to the World Gold Council, central banks added 1,136 tonnes of gold worth approximately $70 billion to their reserves in 2022, marking the highest annual purchase on record. Emerging economies, particularly China, India, and Turkey, are notably expanding their gold reserves.
Gold’s price movements are influenced by a plethora of factors, including geopolitical risks and economic recessions. A weaker US Dollar typically benefits gold prices, while a stronger dollar can keep them in check. Given that gold is priced in dollars (XAU/USD), fluctuations in the dollar play a critical role in determining its market price. Thus, the current economic landscape, combined with looming interest rate changes, positions gold as a pivotal asset for investors navigating uncertainty.
