Gold May Test The $2500 Level In May

Following a brief pullback, gold gained upside momentum and moved towards the $2400 level. What’s next?

China Sells Treasuries To Buy Gold

According to the data from the U.S. Department of the Treasury, China sold $53.3 billion of Treasuries and agency bonds in the first quarter.

Bloomberg noted that Belgium sold $22 billion of Treasuries in the same quarter, which may represent China-linked sales.

Meanwhile, China is actively buying gold for its reserves. For China, gold is the only market that has sufficient liquidity to absorb the huge sums of money it holds as reserves. In addition, gold cannot be blocked by sanctions, which is important at the time when U.S. – China relations get worse day by day.

U.S. has recently hiked tariffs on various Chinese imports, including EV batteries and computer chips. At the beginning of May, U.S. imposed sanctions on multiple Chinese companies for their support of Russian military complex and threatened to cut some Chinese banks off from the dollar-based financial system.

The trend is clear, so China has no other option than to sell Treasuries and buy gold. This process will continue, boosting demand for gold in 2024 and beyond.

Fed Will Likely Start Cutting Rates In September

FedWatch Tool indicates that there is a 49.8% probability that Fed will start cutting rates in September. Markets expect that federal funds rate would drop to 475 – 500 bps by the end of the year.

Gold and other precious metals pay no interest, so falling interest rates are bullish for them.

As usual, the market prepares for the beginning of the rate cut cycle in advance, so investment demand for gold will likely increase in the upcoming months.

A combination of strong demand from central banks and rising demand from investors may soon push gold towards the psychologically important $2500 level.

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