Gold (XAU/USD) edged up by nearly half a percent to the $2,380s on Thursday, buoyed by expectations of future interest-rate cuts following Federal Reserve Chairman Jerome Powell’s recent congressional testimony. Powell, addressing US lawmakers for a second day, struck a balanced tone, expressing cautious optimism that inflation could decrease without significant job losses, a scenario economists often refer to as a “soft landing.” He emphasized the Fed’s commitment to remaining data-dependent in its approach to inflation.
Gold tends to perform well in environments anticipating lower interest rates, as reduced rates enhance the metal’s appeal by lowering its opportunity cost compared to interest-bearing assets.
Furthermore, ongoing reports indicate that central banks globally are maintaining their gold reserves, despite recent news that the People’s Bank of China paused its gold purchases in June after a prolonged buying spree lasting 18 months.
Powell’s remarks on Wednesday contributed to gold’s upward movement. He described current Fed policy as restrictive, signaling that the existing interest rates were effectively curbing inflation towards the Fed’s 2.0% target. Powell also indicated a readiness to act on interest rates, noting that waiting for inflation to fully reach the 2.0% mark could be imprudent given inflation’s inherent momentum. Recent data shows both headline and core Personal Consumption Expenditures (PCE) Price Index hovering at 2.6%, suggesting potential near-term rate adjustments.
Market expectations for a 0.25% cut in the Fed Funds rate by September remain strong, as indicated by the CME FedWatch tool, which assigns a 70% probability to such a move. This tool derives its forecast from futures market pricing.
While investors had hoped for more definitive guidance on the timing of rate cuts, Powell’s overall confidence in achieving a soft landing for the economy provided reassurance. However, Friday’s unexpected rise in the US Unemployment Rate to 4.1% from an anticipated 4.0% tempered some of that optimism, marking the third consecutive month of increase.
Separately, gold prices were bolstered by reports confirming continued gold purchases by central banks worldwide. Despite the absence of the People’s Bank of China, which historically accounts for a significant share of global gold purchases, other institutions such as the Bank of India and the National Bank of Poland have actively increased their gold reserves. Analysts at Citibank foresee a rise in central bank demand through the latter half of the year, projecting an annual increase of 5.8% to approximately 1,100 tons by the end of 2024. They attribute this trend to escalating trade tensions and concerns over US fiscal policies.
Looking ahead, Citibank predicts gold prices could reach $2,600 by the conclusion of 2024. Meanwhile, Bert Melek, Head of Commodity Strategy at TD Securities, forecasts a target of $2,475 for gold in Q1 of 2025.
In summary, gold prices continue to reflect market expectations of impending interest-rate cuts amidst evolving global economic indicators and central bank activities, positioning the precious metal favorably in the current financial landscape.
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