Gold just off all-time highs after rally extends on geopolitical risk
LONDON (August 26) Gold (XAU/USD) trades up into the $2,520s on Monday, just off its all-time highs of $2,531, as a combination of safe-haven demand sparked by rising geopolitical tensions in the Middle East, and increased confidence US interest rates will track lower in the medium-to-long term, make the non-interest paying asset more attractive to investors.
Gold edges higher as risk aversion helps safe-haven demand
Gold trades higher on Monday as geopolitical risk aversion increases investor demand for safe-havens, of which Gold is a notable example.
Rising tensions in the Middle East are a factor, after the Israelis launched a mass pre-emptive strike on Hezbollah positions in Lebanon over the weekend. Hezbollah then retaliated with a hail of missiles and drone strikes in northern Israel. Fears Iran could enter the conflict after weeks of threats also persist.
Powell speech drives Gold higher after sea change in language
Gold rose over a percentage point on Friday after the Chairman of the Federal Reserve (Fed) Jerome Powell made a speech at the Jackson Hole central banking symposium, in which he gave the clearest signals yet that the Fed is going to cut interest rates.
Powell raised concerns that the US labor market is slowing down due to the impact of continuously high interest rates, which have remained at a peak range of 5.25%-5.50% since July 2023. Whilst these had successfully reduced inflation, they were now having a negative impact on company hiring.
“Upside risks to inflation have diminished, downside risks to employment have increased,” said Powell, adding that “Labor market cooling is unmistakable, no longer overheated."
US government bond yields, which reflect investors' outlook for inflation and interest rates, fell after his speech. The yellow metal tends to appreciate when yields drop as it reduces the opportunity cost of holding non-interest paying Gold.
The US Dollar Index (DXY), which measures the strength of the Dollar against a trade-weighted basket, – and is negatively correlated to Gold – sank to a new year-to-date low of 100.53 on Monday morning as traders continued to digest Powell’s comments.
Gold has benefited from elevated expectations that the Fed will make a “mega” 0.50% interest-rate cut in September – double the usual 0.25% reduction. From a probability in the mid-20% prior to his speech, the chances of such a bumper cut have risen back up to the mid-30% afterward, according to the CME FedWatch tool, which uses the price of 30-day fed fund futures in its calculations.
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