Gold futures experienced a dramatic rally, culminating on Wednesday, July 17. The most active August contract surged to a new record intraday high of $2,488.40, narrowly missing the symbolic $2,500 mark by just $12. This peak, along with Tuesday’s record close of $2,467.80, highlights a week of remarkable gains in the precious metals market.
The latest upswing in gold prices can be attributed to Federal Reserve Chairman Jerome Powell’s remarks at the Economic Club of Washington on Monday. Powell indicated that the Fed‘s restrictive monetary policy was achieving its goals, with inflation trending towards the 2% target. This statement bolstered confidence in the gold market, as lower interest rates typically enhance the appeal of non-yielding assets like gold.
“Our test for quite some time has been that we wanted to have greater confidence that inflation was moving sustainably down towards our 2% target. And what increases that confidence is more good inflation data. And lately, here we have been getting some of that,” Powell said.
This rally resulted in gold futures gaining over $185 in just 17 trading days, prompting an anticipated price correction. By the weekly settlement, gold had retraced 50% of its recent gains, a typical adjustment in a bull market. Analysts suggest that a correction ranging from 50% to 78% remains within normal bounds before indicating a potential pivot or key reversal.
Looking ahead, if downward pressure continues, the next major support level is expected at $2,376.50, representing a 61.8% Fibonacci retracement. This level coincides with the 50-day simple moving average, reinforcing its significance as a potential floor for gold prices.
Market attention now shifts to next week’s Personal Consumption Expenditures (PCE) price index report, the Federal Reserve’s preferred inflation measure. Recent consumer and wholesale price indexes indicate a continuing decline in inflation, which could influence the Fed’s decisions at the upcoming Federal Open Market Committee (FOMC) meeting.
While an immediate rate cut at the next FOMC meeting is unlikely, there is a high probability of a rate cut in September. The CME’s FedWatch tool shows a 97.1% chance of the Fed initiating its first rate cut since March 2022, with a 92.6% likelihood of a quarter-point reduction and a 4.5% chance of a half-point cut.
This potential shift in monetary policy could significantly impact gold prices. Historically, lower interest rates support gold by reducing the opportunity cost of holding the non-yielding asset. Although recent profit-taking has moderated the rally, the underlying factors supporting gold’s rise remain intact, suggesting continued investor interest in the medium term.
