Gold consolidates amid investor uncertainty
LONDON (July 1) Gold (XAU/USD) edges lower to chart support on Monday as it continues trading in the range it has been in since it peaked at its all-time high of $2,450 on May 20.
Uncertainty over when the US Federal Reserve (Fed) will begin cutting interest rates keeps investors guessing and limits directionality. Most Fed officials have been reluctant to commit to a first-rate cut date until more data proves inflation is coming down sustainably.
Gold is sensitive to interest rates because it is a non-interest-paying asset, so there is an opportunity cost to holding it. As such, it tends to benefit from more demand when interest rates are lower rather than higher.
Gold stuck in holding pattern as Fed awaits more evidence
Gold is in a sideways consolidation as traders await clearer signaling from the Fed about its policy intentions. Although the Fed’s preferred gauge of inflation, the US Personal Consumption Expenditures (PCE) Price Index continued to fall in line with expectations, reaching 2.6% year-over-year (YoY) in May – closer to the Fed’s 2.0% target – Fed officials speaking after the event still remained cautious about committing to cuts.
Richmond Fed President Thomas Barkin said on Friday that there were “lags” in monetary tightening playing out and cautioned that "services and shelter price-setters still have room to push prices higher." Prior to him, San Francisco Fed President Mary Daly told CNBC that cooling inflation shows that the monetary policy is working, but it’s too early to tell when it will be appropriate to cut rates.
Friday’s inflation data also showed the core PCE also fell to 2.6% from 2.8% previously on a YoY basis and 0.1% from 0.3% on a MoM basis.
Market-based bets of when the Fed could cut interest rates, meanwhile, continue to flag up the September meeting for a possible first cut. According to the CME FedWatch tool, which calculates chances using 30-day Fed Funds futures prices, the probability of a cut in (or before) September stands at 63%, slightly down from the 64% probability of Friday.
Gold in a win-win situation – Zaye Capital Markets
Gold is in a win-win scenario according to Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, who expects the precious metal to eventually appreciate.
Whether the Fed does or doesn’t signal a rate cut, the outcome is likely to be positive for Gold, Aslam told Kitco, since maintaining high interest rates will still be positive for Gold in the long run as they will weigh on sentiment and the property market, increasing demand for Gold as a safe haven.
"Inflation is as low as it can be given the circumstances, and the Fed really needs to move away from its current stance and start giving signals to the market that an interest rate cut is coming. This is because if they don't do that, sentiment in the market would become a lot worse — one evidence of this is already here in terms of pending home sales data and the default levels that we see in the commercial market. So we think, in the absence of assurance, risk could actually increase in the market and it could favor the price of Gold," Aslam said. "On the other hand, if the Fed does give a signal for a rate cut, we would see an upward movement in the gold price due to the weakness in the dollar index," said the CIO.
FXStreet
