Gold (XAU/USD) rallied into the $2,340 range on Wednesday, driven by investor reactions to Federal Reserve (Fed) Chairman Jerome Powell’s recent speech and the indicated shift in monetary policy.
Powell’s remarks at the central-banking forum in Sintra, Portugal, suggested significant progress in combating inflation, bolstering expectations of a potential interest rate cut by September. This prospect has buoyed gold prices, as lower interest rates decrease the opportunity cost of holding non-yielding assets like gold. Powell did, however, caution that more data is required to confirm a sustained move towards the Fed’s 2% inflation target before any rate cuts are implemented, noting the risks of premature or delayed actions.
The rally also finds support from “bargain hunting” by long-term investors, who anticipate further gains due to various global factors favoring the precious metal. Gold is currently attempting to break through the critical 50-day Simple Moving Average (SMA), a key resistance level that has capped its gains recently. A bullish close on Wednesday would signal potential further upside.
Fed Chair Powell’s Comments Boost Rate-Cut Hopes
The market’s positive response to Powell’s acknowledgment of progress on inflation and the Fed’s cautious yet hopeful stance on future rate cuts has been a significant driver of gold’s recent performance. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, showed a decline to 2.6% for both headline and core inflation in May, supporting the case for a dovish monetary policy shift.
This comes after a cautious period for the Fed, following a miscalculation in Q1 when it anticipated a faster decline in inflation, resulting in an abrupt policy reversal. The current market consensus, as reflected by the CME FedWatch tool, suggests a 65% probability of a rate cut by September.
Broader Global Factors Support Gold
Global geopolitical tensions and economic uncertainties are also driving investors towards gold as a safe-haven asset. Ongoing conflicts in the Middle East and Ukraine, along with political instability in Europe, have heightened the appeal of gold.
In the US, the Supreme Court’s decision to grant partial immunity to former President Donald Trump concerning the events following his 2020 election defeat, coupled with questions about President Joe Biden’s fitness for office, have increased the likelihood of a destabilizing second Trump presidency.
Additionally, the expansion of the BRICS trading confederation poses a challenge to the US Dollar’s dominance in international trade. Countries excluded from Dollar-denominated markets are increasingly looking to gold as a viable alternative, further enhancing its value.
Gold’s rise is thus underpinned by a confluence of Fed policy expectations and broader global factors, positioning it as a preferred asset amidst ongoing economic and geopolitical uncertainties.
