Gold prices (XAU/USD) declined slightly on Monday but remained within the range established since reaching its all-time high of $2,450 on May 20. The market remains in a holding pattern as investors await clearer signals from the US Federal Reserve (Fed) regarding future interest rate cuts.
The Fed’s hesitation to commit to a specific timeline for rate reductions continues to leave investors uncertain, thus limiting significant price movement. Fed officials have indicated they need more conclusive data showing sustainable inflation reduction before setting a date for rate cuts.
Gold’s sensitivity to interest rates stems from its nature as a non-interest-bearing asset, making it more attractive when rates are low. Consequently, the potential for lower interest rates generally boosts demand for gold.
Fed’s Caution Leaves Gold in Limbo
Traders are closely monitoring the Fed’s actions, as the central bank’s preferred inflation measure, the US Personal Consumption Expenditures (PCE) Price Index, showed a year-over-year increase of 2.6% in May. This figure is approaching the Fed’s 2.0% target, but officials remain cautious about reducing rates. Richmond Fed President Thomas Barkin highlighted the ongoing “lags” in monetary policy effects and noted that price pressures in services and shelter sectors persist. Similarly, San Francisco Fed President Mary Daly emphasized the need for more evidence of sustained inflation reduction before considering rate cuts.
The latest inflation data revealed that core PCE dropped to 2.6% year-over-year from the previous 2.8%, and on a month-over-month basis, it fell to 0.1% from 0.3%. Despite this, market expectations for a September rate cut remain strong, with the CME FedWatch tool indicating a 63% probability, down slightly from 64% last Friday.
Gold’s Potential Amid Rate Cut Speculation
According to Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, gold is poised to benefit regardless of the Fed’s decision. Aslam believes that maintaining high interest rates could positively impact gold in the long run by dampening market sentiment and affecting the property market, thus increasing demand for gold as a safe haven.
“Given the current low inflation, the Fed needs to signal an upcoming rate cut to avoid worsening market sentiment, evidenced by weak pending home sales data and rising default levels in the commercial market,” Aslam told Kitco. He added that a rate cut signal would likely drive gold prices higher due to a weakening dollar index.
In summary, gold remains caught in a consolidation phase as the Fed’s cautious approach to rate cuts continues to influence market dynamics. Investors are watching closely for any signals from the Fed that could provide clearer direction for gold prices.
