Gold pulls back after new high on China stimulus, dovish Fed bets

• Gold pulls back from a record high after China offloads stimulus and cuts interest rates. 
• Continued bets that the Fed will make another jumbo cut before year-end also fuel the rally. 
• Increased conflict in the Middle East threatens to escalate into all-out war, driving safety flows. 
   

Gold (XAU/USD) pulls back on Tuesday after breaking above its previous all-time high to reach a new record of $2.640 per troy ounce. Market bets of more aggressive interest rate cuts from the Federal Reserve (Fed) are a major driver. The news of a big stimulus push in China, which includes interest rate cuts, is also a factor. Meanwhile, escalating geopolitical tensions in the Middle East are increasing safe-haven flows into the yellow metal. 

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.

Gold hit new highs as market foresees more cuts coming

Gold peaked as market-based probabilities of the Fed making another double dose 50 basis points (bps), or 0.50%, rate cut remain high. The chances of such a cut at the meeting in November currently stand at 50.2% versus 49.8% for a 25 bps cut, according to the CME FedWatch tool. 

On Monday, Fed Bank of Atlanta President Raphael Bostic – a voting member – was relatively neutral in comments about the policy, scoring a 4.0 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.

Non-voting Fed Bank of Atlanta President Austan Goolsbee struck a much more dovish tone, saying inflation had “come way down” and there would be “many more” cuts on their way. His comments scored a 2.0 on FXStreet’s FedTracker.

Fed Bank of Minneapolis President Neel Kashkari (non-voting member) was neutral, scoring a 3.6  on the FedTracker. 

On Tuesday, Federal Reserve Governor Michelle Bowman (voter - hawkish) adopted a hawkish tone during her speech about the US economic outlook and monetary policy at the Kentucky Bankers Association Annual Convention. Bowman said, "with no clear signs of material weakening or fragility, in my view, beginning the rate-cutting cycle with a 1/4 percentage point move would have better reinforced the strength in economic conditions." Her comments scored a 7.0 on FXStreet’s FedTracker.

Gold helped by stimulus dump from People’s Bank of China 

Gold rallies after the People’s Bank of China (PBoC) announced the largest stimulus package since the Covid pandemic on Tuesday. The PBoC is seeking to combat deflation and support the economy to reach its official yearly growth target of roughly 5.0%. 

“The broader-than-expected package offering more funding and interest rate cuts marks the latest attempt by policymakers to restore confidence in the world's second-largest economy after a slew of disappointing data raised concerns of a prolonged structural slowdown,” said Reuters. 

The PBoC said it would cut the seven-day reverse repo rate, its new benchmark, by 20 basis points to 1.5%, its medium-term lending facility by 30 bps to 2.30%, and the five and one-year prime rates by 25-30 bps.

PBoC Governor Pan Gongsheng also announced that the central bank will soon cut the amount of cash that banks must hold as reserves - known as reserve requirement ratios (RRR) - by 50 bps. This is likely to free up about 1 trillion yuan ($142 billion) for new lending, according to Reuters.

Pan further added that depending on the market liquidity situation later this year, the RRR may be further lowered by between 25 and 50 bps.

As a country, China constitutes Gold’s largest market. 

Middle East tensions rise supporting safe-haven flows

Israel ramped up its bombing of Hezbollah targets in Lebanon overnight, causing over 492 deaths, many of them women and children, according to the BBC. 

Hezbollah retaliated by bombing military targets in Northern Israel.  

Gold could rise further if the situation escalates into a full-scale conflict. In terms of what such an escalation might look like, BBC International Editor Jeremy Bowan offers an interpretation. 

“..some kind of ground operation involving (Israel) sending tanks and troops into Lebanon. And that, I think, then goes into a very escalatory and dangerous situation”, Bowan said.

Technical Analysis: Gold reaches new high of $2,640

Gold breaks to new highs on Tuesday. Given the principle in technical analysis that “the trend is your friend,” the odds favor even 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).