Gold Prices Forecast: Will Fed’s Hawkish Tone Keep Prices Under Pressure?

James Hyerczyk
Updated: May 26, 2024, 11:21 GMT+00:00

Key Points:

  • Gold prices drop over $100 after Fed minutes suggest prolonged inflation control measures.
  • Higher rates increase gold's opportunity cost, leading to reduced Western investor interest.
  • Despite 13% YTD gain, Chinese demand may slow, influencing future gold market trends.
Gold Prices Forecast

In this article:

Gold Prices Lower as Fed Minutes Highlight Hawkish Stance

Gold prices posted their worst week in five and a half months as hopes of interest rate cuts by the U.S. central bank faded. After hitting a record high of $2,449.89 on Monday, bullion shed more than $100, marking a 3% drop for the week—the worst weekly dip since early December. This decline comes amid heightened uncertainty over the Federal Reserve’s interest rate policies.

Last week, XAU/USD settled at $2334.00, down $80.715 or -3.34%.

Weekly Gold (XAU/USD)

Profit-Taking and Fed’s Hawkish Stance

The recent sell-off was driven by profit-taking after gold reached its all-time high, compounded by the release of hawkish minutes from the Federal Reserve’s latest policy meeting. The minutes indicated that the path to achieving the Fed’s 2% inflation target might take longer than anticipated. Several Fed officials expressed a reluctance to cut rates in the near term, emphasizing the need for more consistent inflation data before considering policy shifts. This stance pushed U.S. Treasury yields higher, strengthening the dollar and making non-yielding gold less appealing to investors​​​​.

Impact of Higher Rates on Gold

Higher interest rates increase the opportunity cost of holding gold, which does not offer a yield. The Federal Reserve’s commitment to maintaining higher rates has led traders to reassess their expectations. Currently, the market prices in a 63% chance of a rate cut by November, down from previous higher expectations. This recalibration has resulted in reduced investor interest from Western markets, which has historically been sensitive to Fed rate decisions​​​​.

Chinese Demand and Geopolitical Factors

Despite the bearish sentiment from Fed policies, gold prices have managed a 13% gain year-to-date, largely due to strong demand from China and ongoing geopolitical uncertainties. However, there is a growing risk that Chinese retail demand might slow in the second half of the year as the Chinese government focuses on reflating the economy. If Chinese demand diminishes, Western investor sentiment—tied closely to Fed rate decisions—will play a more critical role in supporting gold prices​​​​.

Market Reactions and Forecast

Following the release of the Fed minutes, traders’ bets indicated growing doubts about the likelihood of multiple rate cuts in 2024. The CME FedWatch Tool shows only even odds for more than one rate cut this year. Fed officials have tempered expectations for imminent rate cuts, suggesting a stable rate environment until at least September. Meanwhile, external factors like strong reserve buying by China have provided some support, although high prices may deter discretionary buying in key markets like India​​​​.

Market Forecast: Bearish

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. The market should brace for a bearish outlook next week, with potential for further declines as traders adjust to the Fed’s policy signals and ongoing inflation uncertainties. Monitoring upcoming economic indicators and central bank communications will be crucial for identifying any shifts that could influence gold prices.

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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