Gold prices rose on Monday, approaching all-time highs as geopolitical risks in the Middle East increased. The precious metal’s rally, which began after Federal Reserve Chair Jerome Powell’s speech on Friday, continued as tensions escalated over the weekend.
Middle East Tensions and Fed Signals Boost Gold
Gold (XAU/USD) traded up into the $2,520s, just shy of its record high of $2,531. The surge was driven by safe-haven demand due to rising tensions in the Middle East and growing confidence that U.S. interest rates will decrease in the medium to long term. This makes gold, a non-interest-bearing asset, more attractive to investors.
The upward movement in gold began after Powell indicated a potential shift towards a lower interest-rate environment. His comments suggested that the Federal Reserve might be considering a rate cut, contributing to the bullish sentiment for gold.
U.S. Durable Goods Orders Show Resilience
During the U.S. trading session, the release of U.S. Durable Goods orders showed a 9.9% increase in July, a sharp rebound from the 6.9% decline in the previous month and well above the expected 4% rise. This was the largest gain since May 2020, highlighting resilience in the U.S. economy. Despite this positive economic data, gold prices quickly recovered after a brief dip, continuing to trade within the $2,520 range.
Geopolitical Risks Push Gold Higher
Gold’s appeal as a safe haven increased as geopolitical tensions intensified. Over the weekend, Israel launched a significant pre-emptive strike on Hezbollah positions in Lebanon, prompting retaliatory missile and drone strikes from Hezbollah in northern Israel. There are also fears that Iran might join the conflict, adding to the overall risk aversion in the market.
Powell’s Speech Fuels Gold Rally
Gold prices rose more than 1% on Friday following Powell’s speech at the Jackson Hole symposium, where he hinted at potential interest rate cuts. Powell expressed concerns that the U.S. labor market is cooling due to the prolonged period of high interest rates, which have been at a peak of 5.25%-5.50% since July 2023. While these rates have successfully reduced inflation, they are now negatively affecting employment.
“Upside risks to inflation have diminished, downside risks to employment have increased,” Powell said. “Labor market cooling is unmistakable, no longer overheated.”
Following his comments, U.S. government bond yields fell, reducing the opportunity cost of holding non-interest-bearing gold. The U.S. Dollar Index (DXY), which measures the dollar’s strength against a basket of currencies, dropped to a new year-to-date low of 100.53 on Monday morning as traders digested Powell’s remarks.
Market Expectations for Rate Cuts Rise
Expectations for a substantial interest rate cut by the Federal Reserve in September have increased. The likelihood of a “mega” 0.50% rate cut, which is double the standard 0.25% reduction, rose to the mid-30% range after Powell’s speech, according to the CME FedWatch tool. This tool calculates probabilities based on the price of 30-day fed fund futures.
Technical Analysis: Gold Targets $2,550
From a technical perspective, gold continues to trend upwards. XAU/USD extended its rebound from support at the top of its previous trading range. Despite some sideways trading recently, the pair remains in an uptrend. The breakout on August 14 suggested an upside target of around $2,550, based on the 0.618 Fibonacci ratio of the range’s height. This target is the minimum expectation for further gains following a breakout.
A break above the all-time high of $2,531 from August 20 would confirm a move towards the $2,550 target. Conversely, a break back inside the range, confirmed by a close below $2,470, would negate this target and cast doubt on the short-term uptrend.
Overall, gold remains in a broad uptrend on medium- and long-term time frames, supporting a bullish outlook for the precious metal.