Gold Back to Records on CB Demand and Lower Rates?

Gold trended higher this week as commodity prices rose along with a weaker dollar ahead of the last important economic data of the week and before next week's FOMC.

Quiet on Policy Front

FOMC members entered their pre-decision blackout period this week. This made markets more optimistic about the potential for an interest rate cut. Upcoming labour market figures are expected to show continued loosening, which could pave the way for lower rates. Next week sees unusual timing, with US inflation figures released during the FOMC meeting just hours before the decision.

Currently, the market forecasts an interest rate cut from the Fed in September and further easing after that, which generally supports higher gold prices. However, rising commodity prices reflect a slight expectation increase for quicker rate cuts than predicted a week ago.

Upward with Bumps

The upward trend in gold may continue through the summer due to still-high inflation, lowering interest rates, geopolitical risks and persistent gold stockpiling by major central banks. Last quarter saw record central bank gold purchases despite relatively high prices. With gold costs increasing further in April, central banks purchased even more. This suggests that another record-high price may not dent demand and that prices could continue rising.

While gold prices may trend upwards in the medium term, short-term volatility remains and the metals could experience some bumps. The ECB cut interest rates as expected on Thursday, resulting in higher gold prices due to lower rate expectations. This reaction showed that gold prices may depend more on monetary policy decisions in the near future, supporting the inverse correlation between gold and interest rates.

As such, uncertainty around the timing of lower rate decisions from major central banks like the ECB and Fed could dampen gold prices in the short run. For now, and after the ECB proceeded with its cut, the focus is on the Fed, as markets expect to receive signals around the timing of potential Fed rate cuts.

Gold Turns Sideways

Gold prices have risen sharply in recent months, climbing from $1810 per ounce to a new record high of $2450, suggesting prices may now consolidate as the market absorbs gains. Prices are currently trading within an upward-sloping channel and may continue to do so before pushing on to fresh highs. Support lies at $2275, with a break below, potentially seeing prices slide further to $2220, and eventually, the lower trendline channel may even be tested. Conversely, increasing momentum may send prices up to a new high near 2600, assuming a measured-move length equal to the previous corrective move to $2315.

Source: SpreadEx / GOLD

Key Takeaways

Gold rose this week amid a weaker dollar ahead of labour data and next week's FOMC. During the blackout period, markets grew more optimistic about lower interest rates, given expectations that upcoming job figures show continued loosening. While gold may trend higher over the summer due to inflation, falling rates, geopolitical risks and ongoing bank purchases, it may face short-term bumps from policy decisions, like the upcoming FOMC.