Gold Reaches Two-Month Peak Amid Dollar Challenges and Fed Pause Speculation

Last Thursday, gold reached a two-month high as traders returned to the precious metal with green flags signaling hope for the long-awaited end of the rate-hiking cycle. With speculation at an all-time high over the Federal Reserve’s meeting tomorrow, many see a significant shift in the current policy on the horizon. Tomorrow’s gathering could be the final event, concluding 2023’s aggressive rate-hiking cycle, allowing gold to rise again. 

With this new marketplace consensus, gold has gained the environment it needs to thrive for the last couple of weeks. With reduced expectations over aggressive Fed actions, traders aren’t fearing the opportunity costs of investing in gold anymore. 

Spot gold increased by 0.2% to $1,980.59 per ounce, nearly reaching the level it sustained in May. At the same time, gold futures rose above the critical line to $2,019.60 per ounce on Wednesday. 

“The correction lower in the U.S. dollar is giving gold a shot in the arm, and hence the market is targeting the psychologically important $2,000 level,” Ross Norman, an independent analyst, explained.

While gold continues rallying, the U.S. dollar index dances around 15-month lows. At the same time, the Yuan has gained traction as China’s authorities updated cross-border rules surrounding financing, allowing more major state-owned banks to sell dollars. 

All of these factors seem to be occurring at the perfect time for gold. A weak U.S. dollar makes gold purchases less expensive for buyers overseas. Poor dollar performance also makes safe-haven assets appear more attractive, secure, and reliable. 

Couple the falling U.S. dollar with the dropping interest rates, and gold has its recipe for success. Lower interest rates reduce the opportunity costs for investors interested in holding non-yielding assets like gold. As the marketplace expects the end of the rate-hiking cycle to be announced at July’s meeting, investors feel more comfortable returning to their gold investments. 

Since the end of June, gold prices have already increased by 5% from their three-month lows. The initial price jump came right after the U.S. economic reading, indicating movement in the positive direction, supporting the case that the Federal Reserve had no reason to continue its aggressive interest rate hikes for much longer. 

Now, the marketplace expects one final quarter-point hike for July, potentially marking the end of the cycle. Most importantly, many are anticipating critical comments from Chair Jerome Powell regarding the committee’s opinions on the economy and the need for additional rate-hiking. Considering recent economic data, analysts believe such comments will place July’s meeting as being the last interest rate hike. 

Marketplace estimates for a rate hike in September have already fallen significantly. Most believe July will be the end of it all. The meeting will occur Wednesday, though we likely won’t hear confirmed results until the end of the week. 

The meeting’s events should impact gold prices one way or another, along with numerous other assets, as it always does. If the Federal Reserve announces the end of the rate-hiking cycle, we may see significant gains for gold. 

“The recent reversal in gold prices is very much driven by the expectation that the Fed is almost done in terms of interest rate hikes,” Carsten Menke, an analyst for Julius Baer, explained. 

“That said, we believe interest rates are set to stay high, and a rapid reversal of monetary policy is not imminent due to the resilience of the U.S. economy. Furthermore, we believe that interest rate levels are too high to lure gold investors back into the market,” Menke continued. 

How the Federal Reserve will proceed based on economic readings may be entirely unpredictable, but how investors are responding to the debate is clear. If “interest rate levels are too high to lure gold investors back into the market,” then how did gold increase from $1,956 to $2,019 per ounce last week alone? Interest rates haven’t even dropped yet, and traders are already flocking toward gold. 

Moving forward, all eyes are locked on the Fed’s decision coming by the end of this week. By Friday, we can expect a similar decision from Europe’s central bank as well regarding interest rates. 

“We think that there is a clear understanding among market players that next week the Fed will fire the last bullet from its gun — from there onwards, conversations will only be about the ongoing pause and a possible rate cut taking place. We believe all of that will be highly positive for the gold price,” Naeem Aslam, the chief investment officer at Zaye Capital Markets, chimed in.

As always, investors should consult their financial advisors before making any portfolio decisions. 

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