Analysis: gold hits 3-week high; experts see more gains as rate cut bets increase

Gold prices have been on the rise since the start of the week, and analysts indicate that the yellow metal may build on its recent gains. 

Gold prices on COMEX rose for a fifth consecutive session on Thursday to hit its highest level in more than three weeks. 

At the time of writing, the COMEX gold contract was at $4,214 per ounce.

The contract had hit a more than three week high of $4,223.42 per ounce earlier in the day.

Gold has maintained the gains it made since last Tuesday's low. 

The daily MACD suggests a continued bullish outlook, as it is curling up from neutral territory, according to Trade Nation’s senior market analyst David Morrison.

“But there’s also a hint of nervousness out there. Some participants are concerned that the pullback from last month’s all-time highs may not be over,” he added. 

US government shutdown development 

The recent optimism over the reopening of the US government has surprisingly been beneficial for gold prices. 

“In the case of gold, this is surprising, as the higher risk appetite due to hopes for a settlement of the US government shutdown, which has been going on for a good 40 days, could actually have caused headwinds,” said Carsten Fritsch, commodity analyst at Commerzbank AG.

Experts have noted that with the US government reopening, it would pave the way for the restart of official economic data releases, which would trigger further bets for interest rate cuts in the country. 

The passage of the funding bill brought an end to the government shutdown.

This development has significantly bolstered investor confidence and is contributing to a broadly positive risk sentiment.

“This, in turn, might hold back the XAU/USD bulls from placing fresh bets, especially after the recent strong rise to an over three-week high, touched on Wednesday,” Haresh Menghani, editor at FXstreet, said in a report. 

The reopening of the government also shifts the focus back on the dismal fiscal outlook in the US and concerns over weakening economic growth. 

Gold tends to fare strongly during these times as it is considered a safe-haven asset. 

The ongoing government shutdown is estimated by economists to have already reduced quarterly GDP growth by about 1.5 to 2.0%. Consequently, this is keeping upward pressure on the US dollar in check as well.

US Fed rate cuts

An increase from last month's survey, 80% of economists polled by Reuters now anticipate the Federal Reserve will again reduce its key interest rate by 25 basis points in December. 

This action is expected to bolster a softening labour market.

However, according to the CME FedWatch, bets for a December rate cut were only around 54%. 

According to Atlanta Fed President Raphael Bostic, real-time indicators suggest the job market is currently in a "curious state of balance." 

Speaking on Wednesday, Bostic stated that he does not consider a severe downturn in the labour market to be the most probable outcome in the near future.

“Traders will continue to scrutinise speeches from a slew of influential FOMC members for more cues about the Fed's future rate-cut path,” Menghani noted. 

According to Commerzbank, the impact of the shutdown of the US government will be apparent when the economic data restarts. 

“This, in turn, could lead to more substantial Fed interest rate cuts. Our economists anticipate further interest rate cuts in the coming year beyond the extent expected by the markets, which argues in favour of a higher gold price,” Commerzbank’s Fritsch said. 

The German bank expects gold to trade at $4,200 in the coming year, while silver prices may average $50 an ounce. 

Technical outlook

From a technical view, the price of gold against the US dollar (XAU/USD) appears to be holding above two key levels: the 61.8% retracement of its recent drop from the October high, and the $4,200 mark, according to Menghani. 

This suggests the price has established support in this area.

It is very likely that the gold price will continue to rise towards the $4,250-$4,255 area, then the $4,285 level, and finally the $4,300 price point, Menghani added.

Gold price's potential decline could be limited, which is likely to find support around the $4,100-$4,095 level.

If the above technical point is broken, traders may be prompted to go through with technical selling and drag the yellow metal to $4,075 level.

Further selling would result in prices falling below the psychological level of $4,000, where bearish momentum may take control.