Gold defies overbought conditions, eyes further upside

Gold prices held near record highs on Wednesday as safe-haven demand and hopes of further interest rate cuts boosted sentiments among investors. 

“Expectations for further interest rate cuts by the Federal Reserve (Fed), along with geopolitical uncertainties stemming from the intensifying Russia-Ukraine war and conflicts in the Middle East, continue to act as a tailwind for the precious metal,” Haresh Menghani, editor at FXstreet, said in a report.

On Tuesday, Fed Chair Jerome Powell stated that the central bank must continue to weigh the ongoing risks of elevated inflation against a weakening job market when making future rate decisions. 

This comes as his colleagues remain divided on the appropriate policy approach.

The US dollar has broken a two-day losing streak, showing positive momentum following cautious statements from Powell regarding potential interest rate cuts.

Menghani said:

What’s driving the rally?

Gold prices saw some renewed interest during Asian trading on Wednesday, as traders anticipated further interest rate cuts from the US Fed in October and December. 

This follows a 25 basis point reduction earlier this month, making the non-yielding asset more attractive.

While short-term interest rate cut expectations offer little explanation for the sustained increase in gold prices, an alternative driving force may be at play.

On Friday, Gold ETFs monitored by Bloomberg experienced their most significant one-day surge in holdings since January 2022, with inflows totaling nearly 27 tons.

Nearly 19 tons of gold were attributed to the world's largest gold ETF in the US, marking its strongest daily inflow in six months.

On Monday, a further 8.7 tons were added in total. “Strong buying interest from ETF investors is likely to have given the gold price a boost,” Carsten Fritsch, commodity analyst at Commerzbank AG, said.

ETF inflows have reached a total of 88 tons since the start of the month, according to Bloomberg. 

Several factors likely contribute to this trend, including anticipated interest rate cuts, the US president's continued challenges to the Fed's independence, and various geopolitical developments.

Fritsch added:

Geopolitical tensions

Following recent large-scale provocations by Russia, including the violation of NATO airspace in Estonia, Poland, and Romania, NATO issued a warning on Tuesday. 

The alliance stated its readiness to employ all necessary military and non-military measures in its defense.

Meanwhile, Israel's military assault on Gaza continues amid a newly released UN report. 

The report indicates that the Israeli government intends to establish permanent control over Gaza and secure a Jewish majority in the occupied West Bank.

“This fuels concerns about a broader regional conflict in the Middle East and keeps geopolitical risks in play, which turns out to be another factor offering support to the safe-haven commodity,” Menghani said. 

Traders are now awaiting new impetus from the US New Home Sales data.

Least resistance to upside

Despite previously overbought conditions, the recent rally has continued. 

The re-emergence of dip-buying on Wednesday indicates that the gold price is likely to continue its upward trend, according to Menghani.

A continued sell-off, pushing prices below the Asian session low of approximately $3,750, could lead to the $3,710-$3,700 support range being tested, he added.

The $3,700 level should serve as a robust foundation for gold prices. A decisive break below it would likely lead to further declines.

At the time of writing, the December gold contract on COMEX was at $3,807.10 per ounce, down 0.2% from the previous close.