The bullish momentum in gold is experiencing some resistance in the race to the elusive $2,400 an ounce level. The precious metal has been in fine form, having found support above the $2360 an ounce level in the aftermath of weaker-than-expected US economic data. The yellow metal is on course to finish the week on a high, having gained 6.2% for the week amid weakness in the US dollar.
Gold Interest Rate Talk
A softer-than-expected consumer price index mid-week reignited talk that the US Federal Reserves would be forced to start cutting interest rates. The softer-than-expected US inflation data, followed by weaker-than-expected retail sales data, has pushed hopes that inflation is slowly easing. The FED has constantly reiterated that it is more than ready to act should it become apparent that inflation is falling and drops below the 2% threshold.
With inflation levels edging lower in April, traders are increasingly confident that the central bank will cut rates by 25 basis points at its meeting in September; however, the central bank officials have pushed back on the interest rate cut talks, weighing significantly on gold upward momentum. The central bank officials insist that more data is needed to ensure inflation decreases before cutting interest rates.
Talk of the FED cutting interest tends to trigger dollar weakness, favouring higher gold prices. Lower interest rates significantly reduce yields that people generate from securities such as bonds and treasuries. In return non, yielding assets like gold become a preferred investment option.
Strong Gold Demand
In addition to interest rate talks, gold prices are also being influenced by demand from various central banks across the globe. Increased activity in exchange-traded funds in China has also fuelled demand, resulting in higher gold prices. A buying spree by China, India and Turkey’s central bank in the year’s first quarter helped push and stabilize gold prices above the $2300 an-ounce level.
Nevertheless, elevated geopolitical tensions in the Middle East have had the most significant impact on fuelling jitters in the markets. In times of heightened tensions, demand for gold tends to grow as it is often seen as a store of value. Many people and investors often rush to the precious metal to safeguard their investments.
On the other hand, demand from the jewellery technology and investment sectors remained low in the first quarter despite being a significant factor in driving prices. While geopolitical tensions have subsided in recent weeks, gold prices are still expected to increase by more than 8% by the end of the year. One of the critical factors that could push prices higher is the FED cutting interest rates in the third quarter, which should fuel further dollar weakness and consequently work in favour of higher gold prices.
Meanwhile, silver prices have also been on a roll, having rallied by 12% in April. The rally came at the backdrop of strong demand for industrial metal for various industrial activities. For starters, the metal is experiencing strong demand from the auto industry amid the expanding vehicle electrification and development of renewable energy infrastructure. Likewise, silver benefited from soaring geopolitical tensions and weakness in dollar strength across the board.
