Analyzing Gold Futures: Potential for Further Gains on the Horizon

Based on CME Group’s preliminary information, open interest levels in the gold futures market skyrocketed by 140 contracts last Wednesday as the market anticipated the Federal Reserve’s rate-hiking decision, which would ultimately play out in gold’s favor. Meanwhile, gold futures volumes rose by approximately 45,700 contracts, allowing gold’s recent volatility to gain a level of solid performance. Gold futures peaked last Wednesday, hitting $2,019.80 per ounce, the highest price point in around two months, though many predict additional gains will come soon.

At the same time, spot gold prices have experienced the same level of recent momentum, with barriers reaching $1,987 per ounce. Following last week’s growth, gold futures maintained their level until a sharp pullback on Thursday following a whiplash response to the Federal Reserve’s gathering. Analysts at Credit Suisse are considering this momentary lull a necessary correction, allowing prices to continue moving in the positive direction for a more sustained period.

“We maintain our long-held view for a major floor to be found the key rising 200-DMA of $1,883 and for an eventual retest of major resistance at the $2,063/2,075 record highs to be seen,” economists from Credit Suisse explained. “We still stay biased to an eventual break to new record highs later in the year, which would then be seen to open the door to a move to $2,150 next, then $2,355/65. A weekly close below $1,883 though would be seen to reinforce the longer-term sideways range, and a fall to support next at $1,810/05.”

Both spot gold and gold futures are on the rise, but why are gold futures so popular right now?

Gold futures allow investors to hedge gold price risks on expected future sales or purchases, inflation, alternative asset classes, speculative plays, and more. The flexibility provides a level of portfolio control and risk aversion.

According to market data, gold assets are currently on track for their largest monthly gain since March, following the latest Federal Reserve decision. Last Wednesday, the Federal Reserve decided to increase rates by 25 basis points, though committee members revealed a less hawkish strategy moving forward, hinting at a potential pause going into September and onward. The idea of pausing or cutting rates lowers the opportunity costs of holding non-yielding assets like gold, making it more attractive for investors.

At the same time, recession fears regarding whether or not the Federal Reserve will be able to pull off a soft landing following the end of the tightening cycle have given rise to safe-haven demand. Traders are placing their funds in secure assets that can hold steady if a hard landing occurs, which many are speculating about.

Between the potential of interest rate cuts and a hard economic landing, gold has received a necessary price boost across the board. The weakened U.S. dollar has allowed spot gold to gain over 2% this month alone.

“Gold’s buoyancy is based on the expectation that central banks around the world are coming to the end of their cycle of interest rate increases,” Rupert Rowling, a market analyst at Kinesis Money, explained.

Bullion is currently on target to gain 2.1% this month, while futures are reaching just under 2%. The U.S. dollar is on its second-straight month of decline, allowing all forms of gold to take over as the asset of choice.

“We remain in a supportive scenario because there’s a recession risk, and the expectation that central banks are going to be more dovish next year is the main catalyst supporting the price of gold,” Carlo Alberto De Casa, another market analyst from Kinesis Money, explained.

Last month’s inflation figures showed annual rates progressing at the slowest pace in over two years. Positive market data like this points toward no further need for interest rate hikes. If the Federal Reserve ends its hiking cycle in the next couple of months as expected, it will be the fastest cycle since the 1980s.

“Markets feel vindicated with their assessment that Fed rates are at or near their terminal rate, with key inflation reports from the U.S. all pointing towards a faster pace of disinflation,” Matt Simpson, a senior analyst at City Index, explained.

Both gold futures and bullion provide excellent inflation-hedging tools in a recessionary environment, which we may approach soon, depending on how the economy lands following the end of the Fed’s cycle. Regardless of how everything plays out, analysts are predicting further gains on the horizon for gold futures. As always, investors should consult their advisors before making any portfolio decisions.

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