Gold Price Remains Sensitive to Fed Rate-cut Path

Why Is Gold So Valuable?

1. Safe-haven asset
   
   Gold has always been a highly prized metal, and it is considered a safe investment. In ancient times, gold has been seen as a symbol of wealth and power, nowadays, it has been seen as a safe-haven asset. Amidst today's unpredictable financial landscapes, gold's unparalleled ability to preserve value renders it the foremost safeguard in investors' perspectives.
   
2. Higher ROI
   
   According to data from the World Gold Council, gold has delivered an average annual return of 8% over the past decade, distinguishing it among many investment products as the preferred choice for wealth preservation and appreciation.
   
3. Higher liquidity
   
   The price of gold is driven by speculation in the markets, supply and demand, economic data and indicators, currency values, geopolitical events, central bank policies, investor sentiment, and many other factors. Traders can invest in gold in different ways, including: buy gold in physical forms, gold funds, gold shares, spot gold and so on.

The Correlation between Fed Rate and Gold?

Gold and interest rates traditionally have a negative correlation in the relationship between the two. It is not guaranteed but usually the gold price goes up when interest rates go down, and down when rates go up. Rising interest rates often increase the attractiveness of investments such as stocks and government bonds to investors. Conversely, lower interest rates diminish the appeal of these alternative assets, leading investors to turn to gold instead. This shift in investor sentiment toward gold can increase its demand and price accordingly. Gold is valued as a safe haven during times of financial uncertainty, making it a preferred store of wealth for many investors.

According to the CME's FedWatch Tool, traders in the federal funds futures market assess that there is approximately a 66% probability that the U.S. central bank will decrease interest rates in September. The potentially stalled progress on inflation means monetary policy may not be as tight as Fed officials think it is, lower interest rates reduce the opportunity cost of holding non-yielding bullion.

Any evidence of a trend of easing inflation could prompt the expectation of Fed rate cuts later in 2024. This, in turn, might drag the Greenback lower and create a tailwind for USD-denominated Gold.

Events that affect gold price

• PMI
  
  The stronger-than-expected US Purchasing Managers Index (PMI) released last week triggered the Federal Reserve (Fed) officials to push out the timing of the first interest rate cut this year, which continues to cap the gold’s upside. However, the safe-haven flows on the back of geopolitical tensions in the Middle East and Ukraine might boost the yellow metal in the near term.
  
• The geopolitical situations
  
  The geopolitical situations in the Middle East and Ukraine could potentially bolster the price of gold in the short term. The security pact between Russian President Vladimir Putin and North Korean leader Kim Jong-un in Pyongyang raises the risk of a further escalation of geopolitical tensions.
  
• Fed rate-cut
  
  According to the CME Group's FedWatch Tool, the markets are currently pricing in over a 60% chance that the Federal Reserve will begin cutting interest rates at the September meeting. Gold prices ticked up on Wednesday following weaker-than-expected U.S. retail sales data, which heightened expectations of an interest rate cut by the Federal Reserve later this year.
  
• Currency movements
  
  Gold is priced in US dollars, so movements in the value of the dollar relative to other currencies can affect gold prices. A weaker dollar generally makes gold less expensive for holders of other currencies, boosting demand.
  
• Inflation data
  
  When prices rise and inflation escalates, cash devalues. For protection against inflation, demand for gold rises, providing support for gold prices. San Francisco Federal Reserve Bank president Mary Daly said on Monday she does not believe the US central bank should cut rates before policymakers are confident that inflation is headed towards 2%.

Gold Price Forecast

Bank of America anticipates that although the gold market might seem stagnant currently, it is poised to surge substantially in the future. This projection stems from expectations that the Federal Reserve will lower interest rates later this year, coupled with mounting debt levels contributing to increased economic uncertainty. In a report published Monday, Michael Widmer, commodity strategist at the bank, said that he sees the potential for gold prices to hit $3,000 an ounce in the next 12 to 18 months. However, he added that the market needs to see a pickup in investment demand, which is unlikely to happen until the Federal Reserve gives a clear signal that it is ready to cut interest rates.

Gold price (XAU/USD) attracts some dip-buyers during the early European trading hours on Monday and recovers a part of its retracement slide from a two-week high touched on Friday. Despite the Federal Reserve's (Fed) hawkish surprise, forecasting only one rate cut in 2024, the markets are still pricing in the possibility of two rate cuts this year amid signs of easing inflationary pressures. This, in turn, is seen weighing on the US Treasury bond yields, which, along with a softer risk tone, geopolitical tensions and political uncertainty in Europe, lend support to the safe-haven commodity.

Speaking in a CNBC interview on Monday, Chicago Fed President Austan Goolsbee said that the Fed's monetary policy is restrictive while adding that slowing inflation data would open the door to an easier policy. San Francisco Fed President Mary Daly noted that “recent inflation readings are more encouraging, but it's hard to know if we're on track to sustainable price stability.”

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.