Gold Forecast: XAU/USD sits at record highs, China optimism, dovish Fed offset overbought conditions

Gold price off record highs at $2,635 early Tuesday, focus on Fedspeak, US data.
The US Dollar bounces with Treasury bond yields even as risk flows return on China optimism.
Gold buyers refuse to give up despite overbought RSI conditions on the daily chart.

Gold price is moving slightly away from a new record high of $2,635 early Tuesday, replicating the price action seen in Monday’s Asian trading. Traders look forward to a fresh slew of speeches from the US Federal Reserve (Fed) policymakers and the US Consumer Confidence data before placing more bullish bets on Gold price.

Gold price cheers dovish Fed, geopolitics and China stimulus hopes

Despite a modest recovery staged by the US Dollar and overbought conditions on the daily chart, Gold price holds its position close to the all-time high, as buyers refuse to give up on the back of the latest dovish Fed commentaries, increased hopes of Chinese stimulus coming through and escalating Middle East geopolitical tensions.

At the highly-anticipated press conference, People’s Bank of China (PBOC) Governor Pan Gongsheng announced a series of measures to boost the economic recovery, including plans to cut the reserve requirement ratio (RRR) by 50 basis points (bps). Increased expectations that these stimulus measures would stimulate the economy keep the pullback restricted in Gold price. China is the world’s top yellow metal consumer.

In addition, Bloomberg reported that Israel intensified its airstrikes in southern Lebanon, killing about 500 people while injuring 1000. This was the deadliest attack since the 2006 Israel-Hezbollah war. This follows the weekend’s exchange of missiles by both Israel and Hezbollah, as the Middle-East strife seems to translate into a wider regional conflict. Gold price tends to benefit from geopolitical tensions due to its traditional safe-haven status.

Meanwhile, Gold buyers also stay hopeful, as markets are wagering another 50 bps rate hike in November, courtesy of the dovish Fed talks. Fed policymakers continued to advocate the need for more rate cuts amid looming downside risks to the labor market, as inflation continues to move closer to the bank’s 2.0% target. Amongst the Fed officials who spoke on Monday, Chicago Fed President Austan Goolsbee was the most dovish, noting that “many more rate cuts are likely needed over the next year, rates need to come down significantly.”

The focus now remains on Fed Governor Michelle Bowman’s speech and the US Conference Board (CB) Consumer Confidence data for fresh trading incentives in Gold price, as Middle East escalation will be also closely eyed.

On Monday, Gold price recorded a fresh all-time high after a brief retreat, underpinned by a renewed decline in the US Dollar, as markets turned risk-averse on discouraging global business PMI reports. The S&P Global US preliminary Manufacturing PMI contracted further to 47.0 in September, compared to 48.5 expected and August’s 47.9. The Services PMI also dipped to 55.4 in September from 55.7 in August.

Gold price technical analysis: Daily chart

As observed on the daily chart, the overbought conditions, as represented by the 14-day Relative Strength Index (RSI) sitting above 70, continue to warrant caution for Gold buyers.

If buyers fight back control, acceptance above the record high of $2,635 is critical to unleashing further upside toward the $2,650 psychological barrier. The next relevant resistance is seen at the $2,700 threshold.

Should the corrective downside gather traction, Gold price will likely test the previous day’s low of $2,613, below which the $2,600 threshold will come into play.

Further south, Gold sellers could target the September 20 low of $2,585.

Gold FAQs

Why do people invest in Gold?

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.

Who buys the most Gold?

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.

How is Gold correlated with other assets?

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.

What does the price of Gold depend on?

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.

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