Gold closes in on $2,685 all-time high

Gold rallies ever closer to its previous all-time high at $2,685.
A decline in manufacturing activity in the state of New York triggered the latest bout of buying.
A break above would signal a new all-time high and an extension of the dominant bull trend.

Gold (XAU/USD) extends its recovery into the lower $2,680s on Wednesday after market jitters caused by a dip in US Manufacturing data on Tuesday led to a decline in the US Dollar (USD), a fall in US Treasury yields and a downward revision to the expected path of US interest rates. Lower expected interest rates are bullish for Gold as they reduce the opportunity cost of holding the non-interest paying asset.

Gold rises after US Manufacturing data miss

Gold strengthens after the NY Empire State Manufacturing Index declined into negative territory in October, registering minus 11.4 following an 11.5 rise in September and undershooting expectations of 2.3. This took the index to its lowest level in five months after August’s brief-lived recovery.

That said, the upside for Gold may be limited as Federal Reserve (Fed) officials refrain from adopting a too dovish stance judging from recent commentary. On Tuesday, Bank of San Francisco Fed President Mary Daly said she saw one or two more rate cuts this year, “If forecasts are met.” Her speech scored a neutral 5.8 on the FXStreet FedTracker, which uses a custom AI to gauge the tone of Fed officials’ speeches on a dovish-to-hawkish scale from 0 to 10. This was above her long-running average of 4.5.

Federal Reserve Bank of Atlanta President Raphael Bostic, meanwhile, scored a 6.2 on the FedTracker, which was also above his average of 5.1. Bostic opined the “US economy is doing well,” and that he did not see a recession on the horizon.

Currently, markets are pricing in almost a 94% chance of a 25 basis point cut in the fed funds rate in November and a 6% probability of no-change at all, according to the CME FedWatch tool.

Gold market movers on the calendar

Investors now look ahead to US September’s Retail Sales data on Thursday and a speech from Fed Governor Waller on Friday for further guidance.

Elsewhere, elevated tensions in the Middle East could help sustain upward momentum for Gold, particularly amid heightened expectations Israel will launch an imminent retaliatory attack on Iran.

Technical Analysis: Gold closes in all-time high

Gold extends another leg higher as it recovers from the October 10 low following the conclusion of a three-wave (abc) counter-trend reaction.

XAU/USD 4-hour Chart

Gold has broken above key resistance at around $2,670, and it is closing in on the $2,685 all-time high. A break above that level would indicate a continuation to the next target at $2,700 – a round number and psychological level.

Gold is in an uptrend on a short, medium, and long-term basis, and given the theory that “the trend is your friend,” the odds continue to favor more upside.

It would require a break below $2,600 (low of wave c on the chart) to flip the uptrend and turn the short and medium-term outlooks bearish.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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