Gold did not procrastinate and soared towards six-month highs as soon as Federal Reserve Governor Christopher Waller spoke about lowering the federal funds rate. According to him, if deflationary processes in the U.S. economy continue to gain momentum, there will be no point in such a high cost of borrowing. This fully aligns with market expectations of a loosening of the Federal Reserve's monetary policy in 2024, reducing the yield on Treasury bonds and the value of the U.S. dollar. As a result, a favorable wind is blowing in the sails of XAU/USD.
The price of the precious metal is determined by the cost of money. The lower central bank rates and bond yields are, the better it is for gold, which does not generate interest income. Additionally, it is traded in U.S. dollars. The weaker the American currency, the cheaper the metal for foreign buyers. In this regard, the fall of the USD index to its lowest level since August is excellent news for XAU/USD.
Dynamics of the USD index and U.S. bond yields
The dynamics of the USD index and U.S. bond yields are influenced by the Federal Reserve's monetary policy. The increase in the probability of its easing in May from 51% to 70% after Waller's speech did gold an invaluable service. If before the speech, markets doubted a 100 basis points reduction in the federal funds rate to 4.5% in 2024, now the chances have jumped to 76%.
Investors were concerned that unexpectedly strong U.S. statistics and hawkish rhetoric from FOMC officials could change the balance of power in financial markets. This could lead to a decline in stock indices and an increase in the USD index, which would hinder XAU/USD. This did not happen, and the precious metal soared to a six-month high.
Some decline in its quotes is associated with expectations for the release of U.S. GDP data for the third quarter. According to Bloomberg experts' forecasts, the second reading may increase the growth rate from 4.9% to 5%. The strength of the U.S. economy will restrain the XAU/USD rally. However, it should be understood that gross domestic product is a lagging indicator. A pullback in gold against its acceleration is an excellent opportunity to form long positions.
In fact, the fate of the precious metal will depend on Fed Chairman Jerome Powell's speech by the end of the week on December 1. Waller is an authoritative official perceived by investors as the mouthpiece of the majority in the FOMC. However, only signals from the Fed Chairman about a change in the Central Bank's worldview will finally convince markets of their correctness and allow gold to aim for a new record high as early as 2023. If these signals do not come, XAU/USD risks going into a retracement.
Technically, on the daily chart, gold has entered the convergence zone, which may be a reason to take profits on formed long positions from $1976 and $1981 per ounce. It is formed by targets on the AB=CD patterns at 161.8% and Wolfe Waves. If the precious metal does not linger there, the chances of a new historical high will increase.
