- Gold is extending to fresh all-time highs on news of increase in Chinese demand.
- A weaker US Dollar is further propelling the precious metal higher.
- Middle East peace talks have hit an impasse, further increasing geopolitical risk.
Gold (XAU/USD) trades up to a new all-time high in the $2,520s on Tuesday on the back of news of solid demand from China, a weakening US Dollar (in which the precious metal is mostly priced), and continued geopolitical risks stemming from the Middle East, where peace talks are at risk of running aground.
Gold at new high after news of Chinese demand
Gold continues rallying on Tuesday on the back of increased safe-haven demand from China. The People’s Bank of China (PBoC) issued new Gold import quotas to banks which “triggered speculation of a renewed wave of demand,” according to broker SP Angel. Safe-haven demand for Gold in China rose after Chinese 10-year Government Bond yields fell to record lows last week and, as a result, “Chinese buyers are seeking alternative safe-haven protection, with Gold an obvious candidate,” added the broker.
Gold is gaining a further lift as the US Dollar pushes to a new low eight-month low on Tuesday. The US Dollar Index (DXY) fell to 101.76 in early trade – a positive for Gold since the two assets share a high degree of negative correlation.
Gold may be seeing safe-haven demand after an attempt to reach a peace agreement in the Middle East, spearheaded by US Secretary of State Antony Blinken, stalled with Israel ready to agree but Hamas not because it wants the agreement to include a permanent and not a temporary ceasefire as laid out in the current deal. Hamas further ratcheted up tensions by owning up to a recent suicide bomb attack in Tel Aviv. An Iranian all-out attack against Israel also remains an overhead risk factor.
Technical Analysis: Gold moves up towards breakout target
Gold (XAU/USD) extends to new all-time highs after breaking out a range it was trapped in since July. It is on its way to the initial target for the breakout at $2,550, calculated by taking the 0.618 Fibonacci ratio of the range’s height and extrapolating it higher.
XAU/USD 4-hour Chart
Gold is back in the overbought region of the Relative Strength Index (RSI), however, which indicates a risk of a pullback unfolding. This might drag the Gold price back down before it pushes higher. Such a pullback might be expected to correct to support at around $2,500.
Gold is in a broad uptrend on the short, medium and long-term time frames, however, and given “the trend is your friend”, this uptrend is more likely than not to continue.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
