Gold is headed to one of its most considerable weekly losses of the year, its sentiments and outlook in the market having taken a hit on dissipating expectations of US Federal Reserve interest rate cuts. After starting the week above the $2400 an ounce level and rallying to record highs of $2449, the precious metal is under pressure, having dropped to lows of $2325 an ounce.
Fading Interest Rate Cuts
The precious metal started the year on a roll on expectations that the FED would carry out at least six interest rate cuts. However, with inflation struggling to drop below the 2% level, the prospect of even one interest rate cut before the end of the year is fading fast. The markets are only pricing one cut from the central bank five months into the year.
The FED is expected to stick to the high interest rates buoyed by the strength of the US economy, which has remained resilient and fuelled by strength in the labor market. With the FED staying put, the dollar has continued to grow in strength, working against gold’s strength in the market.
The greenback has already hit a week high on Federal Reserve’s late April meeting minutes, showing that most policymakers are concerned about the sticky inflation. The fact that other policymakers are open to hiking interest rates further despite being at 23-year highs should continue to take a toll on gold sentiments, with the focus shifting to yielding assets like bonds and treasuries.
The US is not the only economy staying put on interest rate cuts. While the European Central Bank is expected to carry out a cut at its next meeting in June, markets expect the central bank to ease back below 60 basis points, as was the case early in the year. High interest rates for long work against gold and other precious metals as they increase the opportunity cost of investing in them.
Safe Haven Outlook
With the interest rate cut boost out of the picture to bolster gold’s outlook, the geopolitical situation takes center stage. Gold has shown resilience, partly due to the escalating tensions in the Middle East, which have made it an attractive store of value in uncertain times. However, even the death of the Iranian president over the weekend, which was expected to escalate tensions, has not significantly impacted gold prices. This shift in safe-haven demand has worked against high gold prices in the market.
As tensions in the Middle East ease, the focus shifts to the ongoing Chinese military exercises around Taiwan. These exercises have historically caused market tensions, potentially fueling demand for the precious metal. Investors should remain alert to these developments and their potential impact on gold prices.
Silver Outlook
Despite the pressure on gold, silver has shown remarkable resilience. This precious metal, renowned for its industrial properties, has been on an upward trend for most of the year, bolstered by growing confidence in bullish gold trends. As a result, the gold-silver ratio has significantly dropped to its lowest level since 2022, a clear sign of increasing investor interest.
Silver continues to garner strong interest from investors who had previously overlooked it in favour of gold. While it has benefited from the growing risk sentiment in the market, it also continues to elicit strong interest and demand as an industrial metal amid the booming economic activity around the globe. According to analysts at investment firm UBS, the strong momentum on precious metals could result in a further upswing in silver prices as it appears to have found support above the $30 price level.
