The price of gold (XAU/USD) saw a decline on Monday, trading in the $2,330s per ounce, influenced by lingering worries about inflation stemming from recent data releases in both the US and Europe.
In Europe, the Harmonized Index of Consumer Prices (HICP), the European Central Bank’s (ECB) preferred inflation gauge, indicated that inflation levels in Germany and Spain remained elevated in April, failing to show signs of abatement. Similarly, data from the US last week revealed ongoing high inflation in the first quarter of the year.
These inflation indicators suggest that both the ECB and the Federal Reserve (Fed) may need to maintain higher interest rates for a more extended period than previously anticipated to combat inflationary pressures. Elevated inflation tends to diminish the appeal of gold as an investment, given its non-yielding nature.
The gold price has been trading largely sideways in recent weeks, following a pullback from its mid-April peak of $2,430. This decline was driven by the realization that interest rates in the United States would likely remain elevated for a longer duration, making cash investments relatively more attractive compared to non-yielding gold.
The recalibration of interest rate expectations was prompted by persistently high inflation in the US. Initially projecting three 0.25% interest rate cuts in 2024, the Fed’s forecast has now been adjusted to anticipate only one and a half 0.25% cuts due to ongoing inflationary pressures.
Further clarity on interest rate outlooks is anticipated when the Fed convenes to decide on monetary policy this Wednesday, with expectations that the gold price may continue to experience subdued trading until then.
Analysts from investment bank TD Securities suggest that while gold prices could face short-term downward pressure if economic data remains robust and inflation persists, they anticipate a recovery in the autumn months. Bart Melek, Head of Commodity Strategy at TD Securities, notes that investor interest is likely to revive once disappointing or negative economic data emerges later in the year.
Melek also highlights the potential for gold prices to surpass recent record levels, forecasting a target above $2,500 as Western demand combines with strong uptake in China. Under this scenario, a price target of $2,500 or higher is deemed reasonable by TD Securities analysts.
