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Gold prices near monthly high amid stabilizing US inflation and Fed rate cut prospects

gold analysis, forex trading

Gold prices remained near a monthly high on Thursday, driven by signs of stabilizing inflation in the United States. This development has increased the likelihood of the Federal Reserve implementing interest rate cuts as early as September. Investors and market analysts are closely watching these economic indicators, which suggest that the central bank may adjust its monetary policy in response to the changing economic landscape. The possibility of lower interest rates tends to boost gold prices, as it reduces the opportunity cost of holding non-yielding assets like gold.

On Thursday, gold prices rose at the start of the session to $2,397 per ounce, reaching the highest level since April 19. This marked a continuation of the gains seen on Wednesday, when the precious metal appreciated by more than 1%. The upward trend in gold prices reflects growing investor confidence in the metal as a safe haven amid economic uncertainty. The consistent rise over consecutive days underscores the market’s positive sentiment towards gold, driven by the broader economic conditions and monetary policy expectations.

Ole Hansen, head of commodity strategy at Saxo Bank, highlighted the favorable conditions for gold and silver, noting, "The combination of stabilizing inflation and weakness in other economic data, such as retail sales, is a really good mix for gold and silver." This suggests that not only is inflation showing signs of cooling, but other critical economic metrics are also not performing strongly, which traditionally supports the demand for precious metals. The weakening of economic indicators like retail sales underscores a broader economic slowdown, prompting investors to seek refuge in gold and silver.

In the previous month, US retail sales were unexpectedly flat, while consumer prices indicated signs of cooling. The lack of growth in retail sales points to cautious consumer spending, which can be a signal of broader economic issues. Additionally, the moderation in consumer prices suggests that inflationary pressures may be easing. Weak labor market data from the previous week further added to this narrative, providing positive news for Federal Reserve policymakers. These policymakers closely monitor such economic indicators, looking for evidence of sustained progress on the inflation front before deciding on potential interest rate cuts.

Ole Hansen also observed that "Gold has gone through a period of consolidation, but this consolidation was very shallow compared to the large rally in March and April. This indicates that there is still hidden strength in the market." The recent consolidation phase in gold prices was relatively minor, suggesting that the metal retains underlying strength. The significant rally earlier in the year demonstrated strong investor demand and confidence in gold, and the shallow consolidation phase implies that the market is still robust and poised for further gains.

Supporting gold prices, the dollar index remained near its lowest level in over a month, while ten-year Treasury yields were at their lowest since April 5. The weakness in the dollar makes gold cheaper for holders of other currencies, thereby boosting demand. Similarly, lower Treasury yields reduce the attractiveness of government bonds compared to gold, as the latter does not yield interest. This dynamic supports higher gold prices, as investors seek better returns in a low-yield environment.

Tim Waterer, chief market analyst at KCM Trade, commented to Reuters, "As inflation stops rising, gold effectively benefits from this situation and looks poised to reach $2,400." Waterer’s analysis highlights that with inflation showing signs of stabilizing, gold stands to benefit as a hedge against potential future economic instability. The anticipated rise to $2,400 per ounce signifies strong market sentiment and confidence in gold's value in the current economic climate.

However, Waterer also noted that a potential rebound in the dollar or Treasury yields could pose significant obstacles for gold prices for the remainder of the week. If the dollar strengthens or Treasury yields increase, it could diminish the appeal of gold. A stronger dollar makes gold more expensive for foreign investors, and higher yields make bonds more attractive compared to non-interest-bearing assets like gold, potentially leading to a sell-off in gold holdings.

Analysts at ANZ highlighted that "Silver is catching up to gold. Strong fundamentals amid rising gold prices are likely to spur investor interest in silver." This observation suggests that as gold prices rise, silver is also gaining traction among investors. Silver often follows gold’s price trends but with more volatility. The strong fundamentals refer to the industrial demand for silver, which, combined with rising gold prices, can drive increased interest and investment in silver. This dual demand for silver, both as a precious metal and an industrial commodity, could lead to significant price increases.

XAU/USD daily chart, MetaTrader, 16.05.2024



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