Monday Jul 8 2024 12:13
8 min
Gold and interest rates traditionally have a negative correlation in the relationship between the two. It is not guaranteed but usually the gold price goes up when interest rates go down, and down when rates go up. Rising interest rates often increase the attractiveness of investments such as stocks and government bonds to investors. Conversely, lower interest rates diminish the appeal of these alternative assets, leading investors to turn to gold instead. This shift in investor sentiment toward gold can increase its demand and price accordingly. Gold is valued as a safe haven during times of financial uncertainty, making it a preferred store of wealth for many investors.
According to the CME's FedWatch Tool, traders in the federal funds futures market assess that there is approximately a 66% probability that the U.S. central bank will decrease interest rates in September. The potentially stalled progress on inflation means monetary policy may not be as tight as Fed officials think it is, lower interest rates reduce the opportunity cost of holding non-yielding bullion.
Any evidence of a trend of easing inflation could prompt the expectation of Fed rate cuts later in 2024. This, in turn, might drag the Greenback lower and create a tailwind for USD-denominated Gold.
Bank of America anticipates that although the gold market might seem stagnant currently, it is poised to surge substantially in the future. This projection stems from expectations that the Federal Reserve will lower interest rates later this year, coupled with mounting debt levels contributing to increased economic uncertainty. In a report published Monday, Michael Widmer, commodity strategist at the bank, said that he sees the potential for gold prices to hit $3,000 an ounce in the next 12 to 18 months. However, he added that the market needs to see a pickup in investment demand, which is unlikely to happen until the Federal Reserve gives a clear signal that it is ready to cut interest rates.
Gold price (XAU/USD) attracts some dip-buyers during the early European trading hours on Monday and recovers a part of its retracement slide from a two-week high touched on Friday. Despite the Federal Reserve's (Fed) hawkish surprise, forecasting only one rate cut in 2024, the markets are still pricing in the possibility of two rate cuts this year amid signs of easing inflationary pressures. This, in turn, is seen weighing on the US Treasury bond yields, which, along with a softer risk tone, geopolitical tensions and political uncertainty in Europe, lend support to the safe-haven commodity.
Speaking in a CNBC interview on Monday, Chicago Fed President Austan Goolsbee said that the Fed's monetary policy is restrictive while adding that slowing inflation data would open the door to an easier policy. San Francisco Fed President Mary Daly noted that “recent inflation readings are more encouraging, but it's hard to know if we're on track to sustainable price stability.”
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.