Gold Price Consolidates as Investors Await Fed Guidance on Interest Rates

Gold prices are trading sideways as investors await insights from the Federal Reserve regarding interest rates. Following a two-day decline, gold is consolidating amid a light economic schedule.

While the US Dollar has seen a slight decrease, its overall appeal remains strong due to the robust performance of the US economy. Positive sentiment is bolstered by a strong order book for US manufacturing and service sectors in 2024.

In Tuesday’s European session, gold prices struggle to find direction amidst the absence of significant data drivers, with the economic calendar in the United States remaining light this week. The recent sell-off in gold has paused temporarily as investors await comments from various Federal Reserve officials regarding interest rates. The rally in the US Dollar Index has slowed down, but further upside is anticipated as Fed policymakers consistently downplay the need for early rate cuts.

Expectations of aggressive rate cuts by the Fed have diminished significantly as the US economy continues to outperform. Fed officials have cautioned against premature rate cuts, emphasizing the potential to support demand and economic growth, which could hinder progress towards the 2% inflation target.

Gold prices face selling pressure as attempts to extend recovery above the critical resistance level of $2,030 are met with resistance. The precious metal has experienced declines as Fed officials push back against expectations of aggressive rate cuts, citing resilient domestic growth and persistent inflationary pressures.

The CME Fedwatch tool indicates that a rate cut in March is improbable, with bets favoring a 25 basis point reduction at May’s policy meeting declining to 55%. Minneapolis Federal Reserve Bank President Neel Kashkari mentioned reduced risks to the US economy, providing the central bank with time to reconsider rate adjustments.

Improvements in employment levels and robust economic prospects contribute to hopes for a “soft landing” for the Fed. Strong labor market data and Manufacturing PMI figures for January, along with outperforming Services PMI data, indicate a solid order book for 2024 in the service sector.

On the geopolitical front, hopes for a ceasefire in Gaza between Israel and Palestine could exert further pressure on gold prices. Discussions between US Secretary of State Antony Blinken and Saudi Arabia’s crown prince regarding regional coordination to end the conflict in Gaza and plans for the post-conflict period could impact gold prices.

Technically, gold prices are confined within a tight range near $2,025 on Tuesday, with the 50-day Exponential Moving Average providing support at $2,021. Despite fluctuations, gold is expected to remain well-supported above the psychological level of $2,000. The 14-period Relative Strength Index suggests a subdued performance ahead, oscillating within the 40.00-60.00 range.


Why do individuals invest in gold?

Gold has played an important part in human history since it has long been utilized as a store of wealth and medium of trade. Aside from its sparkle and use in jewelry, precious metal is now commonly regarded as a safe-haven asset, which means it is a suitable investment during troubled times. Gold is also commonly regarded as a hedge against inflation and falling currencies since it is not dependent on any one issuer or government.

Who buys the most gold?

Central banks are the largest gold holdings. Central banks seek to diversify their reserves and acquire gold in order to strengthen the perceived strength of their economies and currencies during troubled times. High gold reserves may boost faith in a country’s solvency. According to World Gold Council statistics, central banks added 1,136 tonnes of gold to their holdings in 2022, totaling about $70 billion. This is the largest annual buy since records started. Central banks in growing economies like China, India, and Turkey are rapidly boosting their gold holdings.

What is the correlation between gold and other assets?

Gold is inversely related to the US dollar and US treasuries, which are both key reserve and safe-haven assets. When the dollar falls, gold tends to appreciate, allowing investors and central banks to diversify their holdings during tumultuous times. Gold has an unfavorable correlation with risk assets. A stock market gain tends to lower gold prices, whilst sell-offs in riskier markets tend to favor the precious metal.

What determines the price of gold?

A variety of variables might cause price fluctuations. Geopolitical turmoil or worries of a major recession might cause gold prices to skyrocket owing to its safe-haven reputation. Gold, being a yield-less asset, tends to climb in response to decreasing interest rates, but higher interest rates often weigh on the yellow metal. However, since the asset is valued in dollars (XAU/USD), most changes are determined by how the US Dollar (USD) performs. A strong dollar tends to keep gold prices under control, whilst a weaker dollar is likely to drive gold prices upward.

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