During Tuesday’s trading session in North America, gold prices made a notable climb, with buyers eyeing the $2,700 mark—territory not seen since late November. This surge is largely driven by expectations that the Federal Reserve might trim interest rates at their upcoming December meeting. As it stands, gold is trading at $2,694, marking an increase of 1.32%.
The day brought a whiff of optimism from U.S. small businesses about the economic future, as revealed by a survey conducted by the National Federation of Independent Business. However, traders have their sights set on the upcoming release of inflation figures from both consumer and producer sides, slated for Wednesday and Thursday respectively.
There’s a growing buzz among investors about the possibility of a Fed rate cut in the December 17-18 meeting. Supporting this sentiment, data from the CME FedWatch Tool suggests there’s an 86% likelihood that Fed Chair Jerome Powell and his team will reduce the fed funds rate by 25 basis points.
Adding fuel to the rise in gold prices is speculation that China’s central bank has resumed purchasing gold. Moreover, geopolitical factors like the political shakeup in Syria, with Bashar Al-Assad being ousted, are also impacting market dynamics.
As the week unfolds, key data releases in the U.S. will include the Consumer Price Index (CPI), Producer Price Index (PPI), and Initial Jobless Claims.
Gold prices have managed to push forward despite rising U.S. real yields, which ticked up by two basis points to 1.956%. The U.S. 10-year Treasury yield also saw an increase, up three basis points to 4.24%, providing a tailwind for the U.S. dollar. Correspondingly, the U.S. Dollar Index (DXY) rose by 0.40% to reach 106.59 on Tuesday.
Small businesses in the U.S. are showing increased confidence, with the NFIB index hitting 101.7, surpassing the anticipated figures of 95.3 and 93.7 for October. Meanwhile, data from the Chicago Board of Trade via the December fed funds rate futures contract indicates that investors are pricing in a 19 basis point easing by the Fed by the end of 2024.
On the technical side, the uptrend in gold prices has resumed, breaking through the 50-day Simple Moving Average (SMA) at $2,685 and setting its sights on the $2,700 level. A bullish Relative Strength Index (RSI) points to buyers gaining momentum.
In terms of resistance, the first hurdle for XAU/USD would be $2,700, with the next target being the historical high at $2,790. If gold were to dip below the 50-day SMA, support would likely be found around the $2,650 mark. Further declines could see support at $2,600, followed by a confluence of an upward sloping trendline and the 100-day SMA in the range of $2,580 to $2,590, ahead of stronger support at the November 14 low of $2,536.
Turning our focus to the Federal Reserve’s role in monetary policy, it’s important to note that the Fed is tasked with ensuring price stability and fostering full employment. The main tool at its disposal is the adjustment of interest rates. When prices rise too rapidly, surpassing the Fed’s 2% inflation target, interest rates are increased to curb inflation, strengthening the U.S. dollar by making it a more attractive option for international investors. Conversely, when inflation drops below 2% or unemployment is high, the Fed may lower rates to spur economic activity, which can weaken the dollar.
The Federal Reserve holds eight policy meetings annually, where the Federal Open Market Committee (FOMC) evaluates economic conditions and decides on monetary policy. The committee includes twelve Fed officials, comprising the Board of Governors’ seven members, the President of the Federal Reserve Bank of New York, and four regional Reserve Bank presidents who serve on a rotating one-year term basis.
In critical situations, the Fed might employ Quantitative Easing (QE), a measure aimed at increasing credit flow in a stagnant financial system. This approach, utilized during crises like the 2008 Great Financial Crisis, involves the Fed printing more dollars to purchase high-grade bonds from financial institutions, often leading to a weaker dollar.
On the flip side, Quantitative Tightening (QT) is the reversal of QE, where the Fed stops buying bonds and doesn’t reinvest the principal from maturing bonds to purchase new ones, typically strengthening the dollar’s value.
