Gold prices have come under pressure as rising US Treasury yields and diminishing hopes for aggressive interest rate cuts from the Federal Reserve weigh on the precious metal. As of October 7, 2024, gold trades at $2,645, down 0.30%, as US 10-year Treasury yields rose to 4.026%. This rise in yields capped any significant upside in gold prices, but geopolitical tensions in the Middle East are providing some support amid risk-off sentiment.
The market remains focused on two key factors: the Federal Reserve's interest rate outlook and the ongoing conflict in the Middle East. The combination of these elements creates a complex environment for gold traders, with both bullish and bearish pressures at play.
US Treasury Yields: A Significant Factor for Gold
The latest rise in US Treasury yields is a direct result of stronger-than-expected US economic data, specifically the Nonfarm Payrolls report for September. The report showed that the labor market remains robust, sparking a jump in Treasury bond yields. As yields rise, the opportunity cost of holding non-yielding assets like gold increases, leading to downward pressure on its price.
At the same time, traders have scaled back their expectations for a 50 basis point (bps) rate cut by the Federal Reserve. According to data from the CME FedWatch Tool, the odds of a 50 bps rate cut are now at 0%, while the chances of a 25 bps cut remain high at 83.5%. This shift in sentiment reflects the market's view that the Fed is unlikely to take a more aggressive stance on rate cuts in the near term.
The US 10-year Treasury yield, which is a key benchmark for financial markets, has jumped over five and a half basis points to 4.026%. This rise signals that traders are confident the Fed will lower borrowing costs by 25 bps at each of its remaining policy meetings in 2024. However, the prospect of a larger rate cut has now been taken off the table, which is limiting gold's upside potential.
Middle East Conflict Provides Support
While rising US yields are capping gold's advance, geopolitical risks in the Middle East are providing some support. The ongoing conflict between Israel and Hamas, as well as the involvement of other groups like the Houthis, has escalated in recent days. Israel has continued its ground operations in Lebanon, while Hamas has launched rockets at Tel-Aviv. The conflict has broadened, with the Houthis attacking ships in the Red Sea, raising concerns about a wider regional conflict.
This escalation has led to a deterioration in market sentiment, with investors seeking safe-haven assets like gold. The precious metal is often seen as a hedge against geopolitical risks, and the ongoing conflict is helping to prevent a sharper decline in prices.
However, despite the support from geopolitical tensions, gold remains within a narrow trading range of $2,630 to $2,659. The risk-off sentiment from the Middle East conflict is offsetting the bearish impact of rising US yields, keeping the metal in a tight range for now.
Dollar Strength Limits Gold's Upside
In addition to rising yields, the US Dollar Index (DXY) is also weighing on gold prices. The DXY, which measures the dollar's value against a basket of six major currencies, is currently at 102.52. While the index is virtually unchanged, it is hovering at levels last seen in August 2024. A stronger dollar typically puts downward pressure on gold, as it makes the metal more expensive for holders of other currencies.
Technical Outlook for XAU/USD
From a technical perspective, gold remains within a capped trading range, with resistance at $2,650 and support at $2,630. The Relative Strength Index (RSI) suggests that a leg down is underway, despite printing bullish readings earlier in the week. The RSI's slope is now accelerating downward, closing in on the neutral line, indicating that further weakness may be ahead.
If XAU/USD drops below the September 30 low of $2,624, it could trigger a move down toward the $2,600 mark. On further weakness, the next key support level is the 50-day Simple Moving Average (SMA), which currently sits at $2,531.
On the upside, if gold can close above $2,650 on a daily basis, it would need to clear the $2,670 level to challenge the year-to-date high of $2,685. A break above this level could open the door to the psychological $2,700 mark, which would represent a significant shift in sentiment.
Fundamental Drivers: Fed Policy and China’s Bullion Purchases
Looking ahead, the market will be closely watching upcoming US economic data, including inflation figures, the Fed's Meeting Minutes, jobless claims, and the University of Michigan Consumer Sentiment Index. These reports will provide further clues on the Fed's rate path, which will be a key driver for gold in the coming weeks.
In addition, the People’s Bank of China (PBoC) has halted its bullion purchases for the fifth consecutive month, keeping its holdings unchanged at 72.8 million troy ounces. China's absence from the gold market is another factor limiting the metal's upside potential, as demand from one of the world's largest buyers remains subdued.
Conclusion
Gold is currently caught between two opposing forces: rising US Treasury yields, which are capping its upside, and geopolitical risks in the Middle East, which are providing support. As the market awaits further clarity on the Fed's rate path and the ongoing conflict in the Middle East, gold is likely to remain within its current trading range.
Traders should keep a close eye on key support and resistance levels, as a break below $2,624 could signal further downside toward $2,600, while a move above $2,650 could set the stage for a challenge of the year-to-date high at $2,685. With both fundamental and technical factors at play, the coming weeks will be crucial in determining the direction of gold prices.
