Gold’s long-term outlook looks increasingly uncertain in the aftermath of the U.S. Federal Reserve, hinting at only one interest rate cut for the year. While the remarks had initially sent the precious metal tumbling on fuelling greenback strength, a bounce back is already in play, with metal looking set to end the week on the high.
Interest Rates Setback
The yellow metal has demonstrated its resilience, maintaining a strong position above the $2300 an ounce level. Despite significant pressure, including the European Central Bank’s 25 basis point rate cut, gold has remained steadfast, refusing to be pushed below this critical psychological level.
The catalyst behind renewed buying pressure on the precious metal is solid economic data in the U.S., which makes the case for a need to cut interest rates. Additionally, inflation levels dropping significantly and nearing the 2% recommended level are already heightening the case of interest rate cuts even as the Fed stays put and insists on only one rate cut for the year.
While Fed officials estimate a 25 basis points easing before the end of the year, market participants in the Chicago Board of Trade are eyeing 39 basis points before year-end. The U.S. ten-year bond yield has dropped by seven basis points since the Fed issued its reports, acting as another significant tailwind for the non-yielding metal.
Lower interest rates are always a catalyst for gold and other non-yielding assets as they reduce the opportunity cost of holding non-yielding assets. Whenever interest rates fall, investors pay attention to yielding assets such as bonds and treasuries in favor of gold and other securities.
China Central Bank Pause
While interest rate talk has been the primary driver of gold prices, the potential impact of the People’s Bank of China’s gold purchases on market sentiment cannot be overlooked. The bank’s decision to halt purchases between April and May, the first time it has not added to its reserves, could have significant implications. However, the continued consumer demand in China will likely provide ongoing support, even with the bank’s pause.
To escape the U.S. dollar standard, the People’s Bank of China bought more gold in 2023 than any other central bank worldwide, increasing its precious metal holdings to over 2,000 tons. Additionally, Chinese consumers have been accumulating gold coins, bars, and jewelry in tandem with the decline in the value of Chinese stocks, currency, and real estate due to economic volatility.
Any brief decrease in purchases from the most significant gold importer in the world will relieve supply chain strain, leading to a decline in price as gold becomes more widely available. On the other hand, the bank could start buying precious metals once it deems prices to have dropped significantly.
There is good news for investors in precious metals hoping to profit from steadily rising prices, even if Chinese gold purchases abruptly stop or take longer to resume. Concerns about a decreased supply outweigh the decline in demand, as evidenced by a World Gold Council report stating that the difficulty of finding precious metal deposits is increasing. Gold has been trading higher for the better part of the year owing to an aggressive buying spree on concerns that global reserves are depleting faster.
