Gold Prices Forecast: XAU/USD Drops on Profit Taking and Fed Minutes

James Hyerczyk
Published: May 23, 2024, 10:43 GMT+00:00

Key Points:

  • Gold prices drop to a one-week low, marking the third consecutive session of declines due to profit-taking and Fed policy signals.
  • Federal Reserve minutes reveal officials are not rushing to reduce rates, with doubts about high rates' effectiveness on inflation.
  • Despite strong physical demand for gold, high prices may deter buyers, leading to a potential 20% decline in Indian gold imports next year.
Gold Prices Forecast

In this article:

Gold Declines

Gold prices fell to a one-week low on Thursday, marking the third consecutive session of declines. The dip followed the release of the Federal Reserve’s latest meeting minutes, which indicated that interest rates are expected to remain high for an extended period. Spot gold decreased after hitting its lowest since May 15. The bullion, which had peaked at a record $2,449.89 on Monday, has since fallen 3.6%.

At 10:28 GMT, XAU/USD is trading $2366.45, down $12.83 or -0.54%.

Fed Minutes Analysis

The Federal Reserve’s minutes revealed that officials are not in a hurry to reduce rates. Several members even questioned if the current high rates were sufficient to curb inflation. The minutes noted that net long positions held by investors in gold were near their highest level in over three years, reflecting a lack of confidence that the Fed will cut rates more than once in 2024.

Disinflation Expectations

Despite acknowledging some uncertainty, Fed officials maintained their expectation that inflation would eventually return to the 2% target. They emphasized that disinflation could take longer than previously anticipated. The policy response, for now, involves keeping the Fed’s benchmark rate within the 5.25%-5.50% range, though officials expressed a willingness to tighten further if inflation risks materialize.

Market Reactions

Following the minutes’ release, U.S. Treasury yields edged up, and traders reduced their bets on significant Fed rate cuts this year. The minutes indicated an emerging debate on the actual tightness of the current monetary policy, a crucial factor in determining how quickly inflation can be reduced to the 2% target. Some Fed officials have since downplayed the likelihood of imminent rate cuts, projecting a stable rate environment until at least September.

Physical Demand for Gold

Physical demand for gold has remained strong since 2021. However, high prices may deter discretionary buying. Gold prices have increased by 14.5% this year, driven by a rally from March to May. In India, the world’s second-largest gold consumer, high prices could lead to a nearly 20% decline in imports in 2024, as consumers opt to exchange old jewelry instead of purchasing new items.

Market Forecast: Bearish

Given the Fed’s stance on maintaining higher interest rates for a prolonged period and the resulting profit-taking in the gold market, the short-term outlook for gold prices appears bearish. Traders should prepare for potential further declines as the market adjusts to the Fed’s policy signals and the ongoing uncertainty regarding inflation control.

Technical Analysis

Daily Gold (XAU/USD)

XAU/USD is headed lower for a third straight session on Thursday. However, it’s still in correction mode with all three key trends still pointing upward.

The short-term range is $2277.34 to $2450.13. The market is currently trading on the strong side of its 50% level at $2306.85. Trader reaction to this level could set the tone of the day.

A sustained move over $2306.85 will indicate there are still enough traders buying dips.

If $2306.85 fails to hold, we could see a further decline with the uptrending 50-day moving average at $2306.86 the next downside target. This indicator is controlling the intermediate trend.

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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