Gold (XAU/USD) traded around $2,520 on Monday, just shy of its record high of $2,531, driven by heightened safe-haven demand due to escalating geopolitical tensions and growing confidence that US interest rates will trend lower in the medium to long term. The allure of gold as a non-interest-bearing asset increases when other investment returns are expected to decline.
US Durable Goods Orders for July revealed a robust 9.9% increase, reversing the previous month’s 6.9% decline and surpassing the 4.0% forecast. This marked the largest gain since May 2020, highlighting resilience in the US economy despite prevailing pessimism. Gold prices momentarily dipped following the release but quickly recovered to trade within the $2,520s range.
Gold’s ascent is notably supported by rising geopolitical risk aversion, with investors flocking to safe-haven assets. Recent developments in the Middle East, including a large-scale preemptive strike by Israel on Hezbollah positions and subsequent retaliatory attacks, have heightened market anxieties. Persistent threats from Iran further contribute to the volatility.
On Friday, gold prices surged by over a percentage point following a pivotal speech by Federal Reserve Chair Jerome Powell at the Jackson Hole symposium. Powell’s remarks signaled a likely reduction in interest rates, attributing concerns to a slowing US labor market and the adverse effects of prolonged high rates, which have been at 5.25%-5.50% since July 2023. Powell noted, “Upside risks to inflation have diminished, downside risks to employment have increased,” and remarked that the labor market is “no longer overheated.”
Following Powell’s speech, US government bond yields fell, reflecting a softened outlook for inflation and interest rates. Lower yields typically boost gold prices by diminishing the opportunity cost of holding non-interest-bearing assets.
Additionally, the US Dollar Index (DXY), which inversely correlates with gold, dropped to a new year-to-date low of 100.53 on Monday as market participants continued to assess Powell’s statements. Expectations of a significant 0.50% interest rate cut in September have increased, with probabilities rising from the mid-20s to the mid-30s according to the CME FedWatch Tool, which tracks changes in fed fund futures pricing.
