Gold extends to new high on China stimulus, dovish Fed bets
LONDON (September 24) Gold (XAU/USD) breaks above its previous all-time high to reach a new record of $2.640 per troy ounce on Tuesday. 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 hits new highs as market foresees more cuts coming
Gold peaks 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) will deliver a speech about the US economic outlook and monetary policy at the Kentucky Bankers Association Annual Convention.
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.
FXStreet
