Safe-haven flows lifted Gold (XAU/USD) to a new record peak near $3,900 as investors reacted to the shutdown of the United States (US) federal government. Comments from Federal Reserve (Fed) officials and political developments in the US could impact Gold’s valuation in the near term.
Gold benefits from risk-aversion, hits new all-time high
Gold gathered bullish momentum to start the week and broke above $3,800 as market participants sought refuge on growing fears of a federal government shutdown in the US. Following a high-level meeting late Monday, Democrats and Republicans failed to come to terms on funding the government ahead of the Tuesday midnight deadline. Vice President JD Vance said that he thought they were headed to a shutdown, while Senate Democratic Leader Chuck Schumer noted that the two sides still have “very large differences.”
On Tuesday, the data from the US showed that the JOLTS Job Openings edged higher to 7.22 million in August from 7.2 million in July. Nevertheless, the US Dollar (USD) failed to benefit from this data as the federal government has officially shut down, with Republicans refusing to include an extension of the enhanced Affordable Care Act premium subsidies in the funding legislation. In turn, Gold continued to push higher after closing in positive territory on Tuesday and came within touching distance of $3,900 midweek.
With federal agencies in charge of collecting and publishing macroeconomic data, including the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Census Bureau, halting operations until the funding is restored, several key data releases, such as the weekly Initial Jobless Claims and September Nonfarm Payrolls, for the week got postponed. On Wednesday, Automatic Data Processing (ADP) reported that private sector payrolls declined by 32,000 in September. Additionally, the ADP revised August’s print of +54,000 to -3,000.
Gold entered a consolidation phase in the second half of the week, while the Senate did not vote again on the funding legislation. In the meantime, United States (US) President Donald Trump noted that he will meet with Russ Vought, the head of the Office of Management and Budget, to see which federal programs could be cut. Additionally, the Trump administration announced late Wednesday that they frozen $26 billion for Democratic-leaning states.
The final data release of the week showed that the Institute for Supply Management’s (ISM) Services Purchasing Managers’ Index (PMI) declined to 50 in September from 52 in August. The USD struggles to attract investors after this report, allowing Gold to remain in the upper half of its weekly range.
Gold investors will scrutinize political developments
Investors will remain focused on the US politics to assess whether Congress is moving toward a funding deal or the impasse is likely to prolong the shutdown. In case Democrats look to find a middle ground on the spending bill amid the threat of losing funds for their programs, the USD could stage a decisive rebound and trigger a deep correction in XAU/USD with the immediate reaction. On the other hand, Gold is likely to remain in demand as a traditional safe-haven asset if the shutdown continues, especially in a time when markets are already trying to navigate through heightened uncertainty caused by the new US trade regime, the softening labor market conditions and the cloudy inflation outlook.
Comments from Fed officials will also be watched closely by market participants to figure out how the lack of data releases could influence the US central bank’s decision-making process. If Fed officials hint that they could take a step back and delay policy decisions until they have the data they need to assess the current economic environment, Gold could have a hard time continuing to push higher. Conversely, the USD could remain under bearish pressure and allow XAU/USD to hold its ground if policymakers suggest that policy-easing could be the preferred route in anticipation of a potential negative impact of the shutdown on employment, consumer spending and economic growth.
In case government funding is restored, postponed data releases could be published within a relatively short time span. In this scenario, heightened market volatility could distort the impact of data on the USD’s valuation, making it difficult for investors to take positions until the dust settles.
For reference, here is what was said on the potential market reaction to the NFP data in the previous week’s analysis:
“Following the past few months’ dismal readings, another disappointing NFP print could reaffirm a Fed rate cut in December and weigh heavily on the USD and US Treasury bond yields. In this scenario, Gold could gather bullish momentum heading into the weekend. Conversely, the USD could extend its rally and weigh heavily on XAU/USD if the NFP arrives above 70,000 and alleviates worries about labor market conditions.”
Gold technical analysis
Gold remains technically overbought in the near term, with the Relative Strength Index (RSI) indicator on the daily chart holding well above 70 and XAU/USD trading near the upper limit of the nine-month-old ascending regression channel.
On the downside, $3,800 (previous resistance, round level) aligns as the first support level before $3,730 (20-day Simple Moving Average) and $3,700 (mid-point of the ascending regression channel). Looking north, resistance levels could be spotted at $3,900-$3,910 (round level, upper limit of the ascending channel) and $4,000 (round level).
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
