Gold (XAU/USD) is trading higher in the $2,360s on Tuesday, stabilizing after a significant sell-off on Monday. The precious metal remains in demand despite Federal Reserve Chairman Jerome Powell’s hawkish testimony to the Senate Banking Committee. Powell indicated that the Fed has no plans to cut interest rates yet and will be making decisions on a “meeting-by-meeting basis,” adopting a data-dependent approach.
Powell’s remarks strengthened the US Dollar but did not heavily impact gold prices, even with the prospect of higher interest rates for a longer period. Typically, gold underperforms when interest rates are expected to remain elevated, as higher rates increase the opportunity cost of holding the non-yielding asset.
The early-week weakness in gold was also influenced by the People’s Bank of China (PBoC) halting gold purchases for the second consecutive month in June, following 18 months of reserve-building. This news contributed to the initial decline in gold prices.
Political Developments Impacting Gold
Gold prices have also been affected by political developments in the US. The US Treasury bond market is absorbing political risk due to the increased possibility of former President Donald Trump winning the upcoming presidential election. A Trump presidency is anticipated to involve tax cuts and increased borrowing, which could worsen the US fiscal position and lead to higher inflation, thereby keeping interest rates elevated.
The potential for high interest rates makes gold less attractive to investors since it is a non-interest-bearing asset. Additionally, the possibility of Trump’s return to office is pushing bond prices down and bond yields up, benefiting the US Dollar due to its high correlation with yields. This, in turn, puts downward pressure on gold prices, which are primarily traded in USD.
Trump’s presidential bid has gained further traction following a US Supreme Court decision granting him partial immunity regarding the uprising that followed his 2020 election defeat. This ruling diminishes the likelihood that his various indictments will disrupt his campaign or prevent him from taking office.
Meanwhile, current President Joe Biden’s performance in a recent televised debate in Atlanta raised concerns about his cognitive capacity, further bolstering Trump’s position in opinion polls. If Biden were to step down, Vice President Kamala Harris, seen as lacking Biden’s broad appeal, might struggle to maintain the same level of support.
Overall, gold prices are navigating a complex landscape of economic policy and political uncertainty, with investors closely watching developments on both fronts.
