Quick Look:
- Gold Price Decline: XAU dropped over $100 following Fed minutes, the worst weekly loss in five months.
- Interest Rate Impact: The Fed’s commitment to high rates raises the opportunity cost of holding gold, questioning multiple rate cuts in 2024.
- Chinese Demand: Despite a 13% YTD gain, concerns over slowing Chinese retail demand may add pressure.
Gold prices have recently declined over $100 following the latest minutes from the Federal Reserve. This suggests a continued commitment to controlling inflation through prolonged measures. Moreover, the drop has marked the worst weekly performance for XAU in over five months. This erased hopes for imminent interest rate cuts and increased the opportunity cost of holding gold. Consequently, gold has lost some appeal to Western investors despite a year-to-date gain of 13%.
Gold Hits $2,449.89, Drops 3% in Worst Week in 5 Months
Last week, XAU prices reached a record high of $2,449.89 on Monday before plummeting more than $100 by the week’s end, marking a 3% drop. This sell-off was driven by profit-taking at the peak and the Fed’s firm stance on maintaining higher interest rates, highlighting the need for consistent inflation data.
Fed’s Rate Policy Casts Doubt on 2024 Cuts, Gold Less Attractive
The Federal Reserve’s commitment to a higher rate environment has led to a market reassessment, with the likelihood of multiple rate cuts in 2024 now in question. Higher rates increase the opportunity cost of holding non-yielding assets like gold, making it less attractive to investors. The market currently prices in a 63% chance of a rate cut by November, influenced by the Fed’s current posture.
XAU Gains 13% YTD, Despite Potential Chinese Demand Slowdown
Despite these headwinds, gold has maintained a 13% gain year-to-date, driven by strong demand from China and ongoing geopolitical uncertainties. However, there are concerns that Chinese retail demand may slow in the year’s second half, potentially adding further pressure on XAU prices.
Even Odds for Multiple Rate Cuts: Short-Term Bearish Outlook
The market’s reaction to the Fed minutes has been cautious recalibration. The CME FedWatch Tool indicates even odds for more than one rate cut this year, yet Fed officials suggest that the rate environment will remain stable until September. External factors, such as significant reserve buying by China, continue to support gold prices. However, high prices could deter discretionary buying in key markets like India, adding to the bearish outlook in the short term due to the Fed’s hawkish stance.
$2,300 Support for Gold as Central Banks Add 290 Tonnes
The forecast for gold remains bearish, with the potential for further declines. Monitoring economic indicators and central bank communications will be crucial for market participants. Despite the bearish outlook, gold prices have remained supported above $2,300 an ounce, hinting at upside potential. Global demand for gold reached record highs in the first quarter of 2024, with central banks purchasing 290 tonnes of XAU during this period. The People’s Bank of China emerged as the biggest buyer, adding 60,000 ounces in April alone, marking the 18th consecutive month of gold buying. This sustained demand could provide a foundation for a new bull run if market conditions align favourably.
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