Gold surges after Kugler speech and Shanghai bets

• Gold is rising as expectations firm of falling interest rates in the US – a positive for the precious metal. 
• Fed’s Adriana Kugler says a combination of falling inflation and weakening labor market could force rate cut “later this year”. 
• Bets from Shanghai Futures Exchange traders are further bidding up Gold, say strategists from TD Securities. 

Gold (XAU/USD) has broken to a new all-time high of $2,482 during the Asian session on Wednesday. The yellow metal’s gains have been put down to a mixture of firming expectations that interest rates in the US will fall in September, and rising demand from buyers on the Shanghai Futures Exchange (SHFE), according to analysts at Canadian Investment Bank TD Securities. 

The expectation of rate cuts by the US Federal Reserve (Fed) is a key bullish driver for Gold since lower interest rates reduce the opportunity cost of holding the non-interest-bearing asset. 

Gold rises on hopes of a September interest-rate cut

Gold shot up during trade on Tuesday after a speech from the Fed Board of Governors Adriana Kugler in which she said the Fed might cut rates “later this year”. Markets interpreted this as further confirmation of an interest rate cut in September.

“It will be appropriate to begin easing monetary policy later this year if economic conditions continue to evolve favorably,” said Kugler in a speech to the Peterson Institute for International Economics on Tuesday. 

Kugler emphasized how the labor market had shown signs of cooling and was “rebalancing”. She added that further signs of deterioration in labor market conditions could also be a cause for the Fed to lower interest rates. In the Nonfarm Payrolls report for June, the Unemployment Rate rose to 4.1% when economists had expected it to remain at 4.0%. It was the third month in a row that unemployment had risen and the highest level it has been at since November 2021. Unlike most central banks, the Fed has a dual mandate to achieve target inflation (of 2.0%) and “full employment”. 

Her comments come on the back of market-moving statements made by Federal Reserve Chairman Jerome Powell on Monday, in which he highlighted the progress made on bringing inflation back down to target and hinted a cut to interest rates was on the radar. 

The CME FedWatch tool, which uses the price of 30-day Fed Funds futures to calculate probabilities of future rate changes, is pricing in a 100% chance of at least a 0.25% cut in the Fed Funds rate to an upper band of 5.25% in September. Last week, the probabilities had been hovering just above the 60% mark. 

The change in outlook comes after US inflation data in the form of the Consumer Price Index (CPI) undershot expectations in June, when it fell to 3.0%. Personal Consumption Expenditures (PCE) inflation data – the Fed’s preferred inflation gauge – also revealed a cooling in price rises in May, with both core and headline rising only 2.6% and undershooting economists expectations in both cases. 

Shanghai Futures Exchange buying keeps Gold bid – TD Securities

Gold is also rising because of frenzied buying of Gold futures and options on the Shanghai Futures Exchange (SHFE), according to TD Securities. 

“Guess who's back. The top traders in SHFE Gold are piling back into the Yellow Metal. After a month's pause in this cohort's buying activity, positioning for the top traders in SHFE Gold is now rising at a fast clip towards its previous all-time highs set in 2024Q1,” says Daniel Ghali, Senior Commodity Strategist at TD Securities. 

SHFE traders have added over 10 tonnes of Gold to their books “over the last five trading sessions, driven almost exclusively by new longs,” says Ghali. 

Additionally, discretionary traders are piling back into Comex Gold, says the strategist. 

TD’s research suggests that Gold is potentially benefiting from the “Trump trade” in addition to expectations that the Fed will commence its cutting cycle. 

Technical Analysis: Gold breaks out of range and makes new all-time-high

Gold has broken decisively out of the top of its range, making a new all-time high in the process. 

The precious metal now appears to have completed its sideways consolidation and is recommencing its broader uptrend. 

XAU/USD Daily Chart

The decisive break above the $2,451 high unlocked Gold’s next upside target of $2,555, calculated by extrapolating the 0.618 Fibonacci ratio of the height of the range higher.