Gold (XAU/USD) surged to a new record high of $2,610 on Friday, driven by growing expectations that central banks worldwide will follow the Federal Reserve (Fed) in easing monetary policies and cutting interest rates. Lower interest rates tend to favour gold, decreasing the opportunity cost of holding a non-yielding asset, making gold more attractive to investors looking for safer investments.
Gold Hits New Record
On Friday, gold surged past its previous record of $2,600, set just two days earlier following the Fed’s decision to cut rates by 50 bps (0.50%). Despite this upward momentum, the precious metal’s gains were somewhat limited by the Fed’s optimistic outlook for U.S. economic growth. The Fed projects stable growth of around 2.0% per year until 2027, signalling a “soft landing” scenario for the economy, which is generally favourable for investor sentiment but less favourable for safe-haven assets like gold.
However, geopolitical tensions, particularly in the Middle East, are providing some support for gold. Rising conflict risks, including Israel’s use of exploding pagers and walkie-talkies against Hezbollah agents in Lebanon, have fueled concerns of a potential escalation, bolstering demand for the safe-haven asset.
Global Central Banks Follow Fed’s Lead in Cutting Rates
Following the Federal Reserve’s decision earlier this week, several global central banks have also moved to cut interest rates. On Thursday, the South African Reserve Bank (SARB) reduced its key interest rate by 25 basis points (bps), marking its first cut since the COVID-19 pandemic in 2020. The Philippines Central Bank followed suit, slashing its rates by 250 bps to 7.0% at its meeting on Friday. Speculation is growing that the Reserve Bank of India (RBI) will align with the Fed and reduce interest rates at its next meeting.
While the People’s Bank of China (PboC) kept its key lending rates unchanged at its September meeting, its one-year and five-year loan prime rates are at record lows of 3.35% and 3.85%, respectively, following an unexpected rate cut in July. Meanwhile, despite speculation about a possible rate hike, the Bank of Japan (BoJ) kept its interest rates steady during its Friday meeting.
Technical Analysis: Gold’s Uptrend Continues
Gold’s strong performance on Friday, breaking above the previous record of $2,600, reflects the continuation of its long, medium, and short-term uptrends. As the saying in technical analysis goes, “the trend is your friend,” and current trends suggest there is potential for more upside in gold prices.
The next major resistance level for gold is the psychologically important $2,650 mark, followed by $2,700. Despite this upward trend, Relative Strength Index (RSI) data from the daily chart shows that gold is not yet overbought territory, indicating that there could still be room for further gains.
However, traders should exercise caution if gold’s RSI crosses overbought territory on a closing basis. In that scenario, it would be advisable not to add to long positions. If the RSI enters and then exits the overbought zone, it may be a signal to close long positions and prepare for a potential price correction.
Potential Correction and Key Support Levels
If a correction occurs, gold will likely find support at several critical levels. Initial support lies at $2,550, followed by $2,544, the 0.382 Fibonacci retracement level of the September rally. Another critical support level is $2,530, the previous range high. These levels could serve as solid cushions in case of a pullback, offering traders potential entry points for new long positions.
Conclusion
Gold’s record-breaking rally to $2,610 highlights the metal’s appeal amid global interest rate cuts and heightened geopolitical risks. While there is potential for further gains in the short term, traders should remain cautious of overbought conditions and be prepared for a possible correction. Key support levels provide some safety nets for traders, while global monetary easing and geopolitical uncertainties continue to offer tailwinds for the precious metal.
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