Gold Prices Forecast: Bearish Week as XAU/USD Tumbles Amid Fed’s Hawkish Tone

James Hyerczyk
Updated: May 24, 2024, 12:00 GMT+00:00

Key Points:

  • Gold hits a two-week low with its largest weekly loss in five months after Fed minutes.
  • The Fed’s reluctance to cut rates strengthens the dollar, putting pressure on gold prices.
  • Chinese reserve buying remains a support factor, though the pace has slowed recently.
Gold Prices Forecast

In this article:

Gold Prices Drop Amid Hawkish Fed Minutes

Gold prices hit a two-week low on Friday, set for their largest weekly loss in over five months, as the likelihood of interest rate cuts diminished following the release of hawkish minutes from the U.S. Federal Reserve’s recent policy meeting.

At 10:43 GMT, XAU/USD is trading $2341.77, up $13.095 or +0.56%.

Fed’s Hawkish Stance

The minutes from the May meeting revealed the Fed’s reluctance to cut rates, with policymakers expressing concern about inflation and indicating potential further rate hikes. This hawkish tone drove up Treasury yields and strengthened the dollar, putting pressure on non-yielding assets like gold. The price action this week shows that the metals have reacted noticeably to the Fed’s position.

Impact of Higher Rates on Gold

Higher interest rates increase the opportunity cost of holding gold, which offers no yield. The Fed’s minutes reflected a commitment to maintaining the current benchmark rate of 5.25%-5.50%, with some officials willing to consider additional hikes if inflation pressures persist. Despite the Fed’s confidence that inflation will eventually return to the 2% target, the timeline is now expected to be longer than initially thought.

Market Reactions

Following the release of the Fed minutes, U.S. Treasury yields edged higher, and traders adjusted their expectations for rate cuts this year. The rate-futures market now shows only even odds of more than one rate cut in 2024. Fed officials have tempered expectations for imminent rate cuts, emphasizing the need for more consistent inflation data before changing the current policy stance.

External Factors

While the Fed’s policy is a significant factor, external elements also play a role in gold’s performance. Chinese reserve buying remains strong, though the pace has slowed, providing some support to gold prices. The gold/silver ratio’s recent drop suggests that momentum might shift back in favor of gold, potentially limiting further losses.

Market Forecast

Given the Fed’s hawkish outlook and the potential for further rate hikes, gold prices are likely to remain under pressure in the short term. However, continued demand from major buyers like China could offer some support, keeping losses in check. Traders should brace for a bearish outlook in the near term but monitor demand closely.

Technical Analysis

Daily Gold (XAU/USD)

XAU/USD is down sharply for the week and in a position to challenge the 50-day moving average at $2309.67. Since the intermediate and longer-term trends are up, we expect buyers to step in on a test of this moving average.

The next technical bounce will be critical because if gold doesn’t rally through $2450.13, the market could rollover to the downside, first taking out the 50-day moving average then the short-term bottom at $2277.37. This could lead to a considerable correction.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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