Gold Price Hits Fresh All-Time High as Safe-Haven Demand Offsets USD Strength
Gold Price Hits Fresh All-Time High as Safe-Haven Demand Offsets USD Strength
Gold (XAU/USD) surged to a fresh all-time high during the European session on Wednesday, reversing an intraday dip near the $2,738 level. Amid the backdrop of rising geopolitical tensions in the Middle East, ongoing US political uncertainty, and a dovish outlook from global central banks, demand for the safe-haven asset has been on the rise. However, the sustained strength of the US Dollar (USD) and elevated US Treasury yields are putting a cap on gold’s gains, creating a tug-of-war between bullish and bearish forces. This article will explore the factors driving gold’s record-breaking rally, along with the potential risks and challenges facing the yellow metal.
Factors Supporting Gold’s Record Rally
1. Middle East Geopolitical Tensions Boost Safe-Haven Demand
The conflict in the Middle East has once again intensified, contributing to the safe-haven demand for gold. Hezbollah’s recent rocket attacks on two military bases near Tel Aviv and a naval base near Haifa have heightened geopolitical risks. Additionally, fears of an impending Israeli retaliatory strike against Iran in response to a ballistic missile attack on October 1 have further fueled market uncertainty.
Gold is widely regarded as a safe-haven asset during times of geopolitical instability. As tensions in the Middle East escalate, investors are seeking refuge in gold, driving its price to unprecedented levels. The lack of progress in diplomatic efforts to resolve the year-long conflict adds to the bearish sentiment, providing further support to gold prices.
2. US Political Uncertainty
Adding to the geopolitical risks is the political uncertainty in the United States, which is lending further support to gold. With the US presidential election on the horizon and the possibility of former President Donald Trump winning the November 5 election, market participants are concerned about the potential introduction of inflationary policies, such as tariffs. These concerns have prompted some investors to turn to gold as a hedge against inflationary pressures and political risks.
Moreover, the deadlock in the US Congress over fiscal policies and government spending continues to weigh on market sentiment, contributing to the bullish outlook for gold. The uncertainty surrounding fiscal policies may result in higher inflation expectations, further boosting demand for gold.
3. Easing Monetary Policy Expectations
Another factor contributing to gold’s rally is the anticipated easing of monetary policies by major central banks. As the global economy shows signs of slowing, central banks around the world, including the Federal Reserve (Fed), are expected to cut interest rates to support economic growth. Gold, being a non-yielding asset, typically benefits from lower interest rates, as it reduces the opportunity cost of holding gold compared to interest-bearing assets.
According to CME Group’s FedWatch Tool, traders are pricing in a nearly 90% chance that the Fed will reduce borrowing costs by 25 basis points at its next policy meeting in November. This dovish outlook, combined with the possibility of rate cuts by other major central banks, has provided a tailwind for gold’s ongoing uptrend.
USD Strength and Elevated Treasury Yields Cap Gold Gains
1. Strong US Dollar Limits Gold’s Upside
Despite the factors supporting gold, the US Dollar has remained strong, which has limited the extent of gold’s rally. The USD has been on an upward trajectory since the start of the month, driven by expectations that the Fed will adopt a less aggressive stance on policy easing. Investors have been betting on smaller rate cuts, which has kept the USD elevated against other major currencies.
The US Dollar Index (DXY), which tracks the USD against a basket of six major currencies, has climbed to its highest level since early August. A strong USD typically exerts downward pressure on gold prices, as gold is denominated in dollars and becomes more expensive for investors holding other currencies.
2. Rising US Treasury Yields
Alongside the strength of the USD, US Treasury bond yields have also risen, putting a damper on gold’s momentum. Yields on US government bonds are near multi-month highs, with the benchmark 10-year Treasury yield hovering around 4.2%. The rising yields reflect growing concerns about a resurgence in inflation and expectations that the Fed may adopt a cautious approach to rate cuts.
Higher bond yields make interest-bearing assets more attractive compared to non-yielding assets like gold, as they offer investors a return on investment. This dynamic has led to some traders hesitating to place fresh bullish bets on gold, especially as it approaches overbought levels on technical charts.
Technical Outlook: Key Levels to Watch
1. Gold’s Upward Momentum Faces Resistance
From a technical perspective, gold is currently facing resistance near the $2,750 area, followed by the upper boundary of a two-week-old ascending channel around $2,767. This region represents a critical pivot point for the yellow metal. If gold manages to break through this resistance level decisively, it could pave the way for an extension of its well-established uptrend, potentially pushing prices toward the $2,800 psychological mark.
However, traders should be cautious, as overbought conditions on the daily chart suggest that gold may be due for a near-term pullback. The Relative Strength Index (RSI) is flashing overbought signals, which could lead to some profit-taking in the short term.
2. Key Support Levels for Gold
On the downside, any pullback in gold prices is likely to find support near the $2,725 level, which marks the lower boundary of the ascending trend channel. A decisive break below this level could trigger further technical selling, dragging the metal toward the $2,700 mark. The next major support level lies around the $2,680-$2,675 zone, which coincides with the 100-period Simple Moving Average (SMA) on the 4-hour chart. This area is expected to act as a strong base for gold prices, limiting further downside risks.
Daily Digest: Market Movers to Watch
Several factors will continue to influence gold prices in the near term, including geopolitical developments, US political dynamics, and central bank policies. Traders will also be closely watching economic data releases and speeches from key policymakers to gauge the potential impact on gold.
- US Existing Home Sales Data: The release of US housing market data could provide short-term impetus for gold, as it will offer insights into the strength of the US economy and the potential for further policy easing by the Fed.
- Fed Speeches: A scheduled speech by Richmond Fed President Thomas Barkin later in the US session will be closely monitored for any hints regarding the Fed’s policy outlook. Any comments suggesting a less aggressive rate-cutting stance could weigh on gold.
- Middle East Geopolitical Risks: Ongoing tensions in the Middle East will remain a key driver of safe-haven demand for gold. Any escalation in the conflict could push gold prices higher, while a resolution of the crisis could dampen demand for the precious metal.
Gold’s Rally Continues, But Headwinds Remain
Gold’s recent rally to fresh all-time highs has been driven by a combination of geopolitical risks, US political uncertainty, and expectations of easing monetary policies. However, the strength of the US Dollar and rising US Treasury yields are acting as headwinds, capping gold’s upward momentum.
While the long-term outlook for gold remains bullish, especially in the face of ongoing uncertainties, traders should be mindful of potential short-term pullbacks as the metal approaches key resistance levels. Technical factors, such as overbought conditions and support levels, will play a crucial role in determining the direction of gold prices in the coming days.
