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Gold faces uncertain future amid consolidation and Fed policies

Gold faces uncertain future amid consolidation

Gold remains above the crucial support level of $2300 per ounce, demonstrating some resilience in the face of recent market fluctuations. However, the XAU/USD rate continues its consolidation phase, a period of price movement characterized by relatively small fluctuations. This consolidation phase is generally seen as a corrective pattern, a temporary pause before the market resumes its previous trend, often leading to a larger sell-off.

Analysts are particularly cautious, noting that these patterns typically precede a more significant downward movement in prices. The consolidation is reflective of market participants weighing economic data, interest rates, and global economic conditions. Analysts warn that if the current trend continues, gold prices might soon drop to around $2200 per ounce, representing a further 5% decline from current levels. This potential decline is not merely a reaction to recent events but is rooted in deeper market dynamics and economic indicators.

They highlight the considerable uncertainty surrounding interest rate cuts in the US. The Federal Reserve's policy decisions are now primarily contingent on upcoming economic data, which can be highly variable and subject to frequent revisions. This uncertainty adds a layer of complexity to market predictions, making it challenging for investors to navigate the current economic landscape.

Gold is still reeling from the dramatic market events of last Friday when it experienced a crash of over 3.5%. This sharp decline was triggered by unexpected US employment data that caught the market off guard. The employment figures were significantly stronger than anticipated, leading to a rapid reassessment of economic conditions and monetary policy expectations. Within hours, the market adjusted its expectations for this year's interest rate cuts from three 25 basis point reductions to just one.

This rapid shift underscores the sensitivity of the gold market to macroeconomic indicators and the Federal Reserve's policy outlook. The unexpected employment data highlighted the robustness of the US labor market, suggesting that the economy might be more resilient than previously thought. This resilience diminishes the likelihood of aggressive monetary easing, thereby exerting downward pressure on gold prices. The swift market reaction also reflects the interconnectedness of global financial markets and the speed at which information can alter investor sentiment.

From a technical perspective, the XAU/USD rate managed to defend the support level of $2300 per ounce. This level has been a critical point for traders and investors, serving as a psychological threshold and a technical support level. However, the relief from maintaining this support was short-lived. Yesterday’s speech by Federal Reserve Chairman Jerome Powell further dampened the optimism among gold buyers. Despite signs of decreasing inflation, Powell made it clear that the Fed is not in a hurry to cut interest rates. He emphasized the need for sustained and clear evidence of economic change before altering the current monetary policy stance.

Powell's remarks suggest a cautious approach to monetary easing, reflecting concerns about potential inflationary pressures and the need to maintain economic stability. This cautious stance from the Fed implies that interest rates may remain elevated for an extended period, which is generally negative for gold prices as higher interest rates increase the opportunity cost of holding non-yielding assets like gold.

In his speech, Powell projected higher average inflation for both 2024 and 2025, indicating that the battle against inflation is far from over. This projection adds to the uncertainty surrounding the future path of monetary policy. Investors had been hoping for more immediate and decisive rate cuts, but Powell's cautious tone has tempered those expectations. He stated that the Fed would maintain the current interest rates until clear economic signals necessitate a change.

Given the mixed macroeconomic data, with some indicators showing strength and others pointing to weaknesses, investors interpreted Powell's remarks as an indication of the continuation of current policies for as long as possible. This could mean only one rate cut this year, likely in December. The prolonged period of high-interest rates increases the downward pressure on gold prices. The longer interest rates remain at 23-year highs, the greater the opportunity cost of holding gold compared to interest-bearing assets. This dynamic is particularly relevant in the current economic environment, where other financial instruments that offer yields become more attractive relative to gold.

Although gold is currently favored in investment portfolios due to geopolitical and economic risks, the high-interest rates make other interest-bearing financial instruments attractive alternatives to gold. The geopolitical landscape, marked by uncertainties and potential conflicts, has driven investors towards gold as a safe-haven asset.

However, the attractiveness of gold is tempered by the opportunity cost associated with holding it when interest rates are high. Analysts caution investors about further declines in the gold market, which might halt only around $2200 per ounce. This outlook is rooted in the broader economic context and the actions of central banks worldwide. Central banks, which have been significant buyers of gold in recent years, are now limiting their purchases. This reduction in demand from a key sector further pressures gold prices. Moreover, all positive news seems to have been priced in, leaving little room for upward movement in the near term.

We are in a scenario where both the dollar and gold could move in the same direction. Traditionally, gold and the dollar have an inverse relationship, but in the current market environment, they might both face downward pressure. The next critical level for gold is around $2300. If gold falls below this level, it is more likely to test the $2200 mark again. This potential decline underscores the fragile state of the gold market and the numerous factors influencing its trajectory.

Until the People's Bank of China resumes its gold purchases, prices may continue to drop. The actions of the People's Bank of China are crucial for the gold market, given China's significant role in global gold demand. The absence of Chinese buying interest could lead to lower prices, as the market adjusts to reduced demand. This situation highlights the interconnectedness of global markets and the importance of major economic players in determining commodity prices. As the market navigates these uncertainties, investors must remain vigilant and adapt to the evolving economic landscape.

gold analysis, forex trading
XAU/USD daily chart, MetaTrader, 13.06.2024

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