- Gold price attracts some haven flows amid the risk-off mood and Middle East tensions.
- Sliding US bond yields contribute to driving flows towards the non-yielding yellow metal.
- Bets for smaller rate cuts by the Fed underpin the USD losses and might cap the XAU/USD.
Gold price (XAU/USD) scales higher for the second straight day on Wednesday – also marking the fourth day of a positive move in the previous five – and climbs a three-week high, around the $2,677-$2,678 region heading into the European session. The disappointment over the lack of details about China’s fiscal stimulus, along with persistent geopolitical risks, temper investors’ appetite for riskier assets. This is evident from a weaker tone around the equity markets and benefits the safe-haven precious metal.
Meanwhile, the anti-risk flow leads to a further decline in the US Treasury bond yields and further underpins the non-yielding Gold price. That said, firming expectations for a less aggressive policy easing by the Federal Reserve (Fed) and bets for a regular 25 basis points (bps) rate cut in November should limit the downside for the US bond yields. Apart from this, an extension of the US Dollar (USD) rally, to its highest level in more than two months, might hold back bulls from placing fresh bets around the commodity.
Daily Digest Market Movers: Gold price bulls regain control amid the global flight to safety
- US Treasury bond yields fell for a second day on Tuesday as traders reacted to weaker-than-expected manufacturing data and easing inflation risks on the back of fall oil prices, boosting demand for the non-yielding Gold price.
- The New York Federal Reserve’s Empire State Manufacturing Index fell following a surge to a 29-month high in September, to -11.9 in October, marking the weakest reading since May and indicating deteriorating conditions.
- Easing fears of a supply disruption, along with a weaker demand outlook, drag Crude Oil prices to a two-week low, which is expected to reduce inflationary pressures and allow the US central bank to cut interest rates further.
- The markets, however, are pricing in a greater possibility of a smaller interest rate cut at the next FOMC policy meeting in November, which should underpin the US Dollar and keep a lid on any further gains for the XAU/USD.
- Meanwhile, San Francisco Fed President Mary Daly noted on Tuesday that the US central bank has made significant progress on tamping down inflation and sees one or two more rate cuts this year if economic forecasts are met.
- Separately, Atlanta Fed President Raphael Bostic said that he doesn’t see strong signs of a potential recession looming over the horizon as the US economy continues to perform well and that the inflation is heading back to 2%.
- On Tuesday, Israeli Prime Minister Benjamin Netanyahu rejected the idea of a ceasefire in Lebanon, while the militant group Hezbollah threatened to widen its attacks, raising the risk of a further escalation of the conflict.
- The Biden administration has warned Israel that it faces possible punishment, including the potential stopping of US weapons transfers if it does not take immediate action to let more humanitarian aid into Gaza.
- The market attention will be on the US economic releases – Monthly Retail Sales, Industrial Production, and the usual Weekly Initial Jobless Claims – and the Chinese macro data dump due later this week.
Technical Outlook: Gold price could surpass all-time peak and aim to conquer the $2,700 mark
From a technical perspective, any subsequent move up is likely to confront some resistance near the $2,685-2,686 region, or the
all-time peak touched in September. This is closely followed by the $2,700 round-figure mark, which if cleared decisively will set the stage for an extension of a well-established multi-month-old uptrend amid positive oscillators on the daily chart.
On the flip side, immediate support is pegged near the $2,650 area, below which the Gold price could slide to the $2,632-2,630 region. Any further decline is likely to attract some buyers and remain limited near the $2,600 round-figure mark. The latter should act as a key pivotal point, which if broken decisively might prompt some technical selling and pave the way for deeper losses.
(An earlier version of this story was corrected on October 16 at 06:48 GMT to say, in the second bullet, that the pair is XAU/USD, not XUA/USD.)
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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