- Gold traders are optimistic that the Fed will start lowering borrowing costs in September.
- Market participants will watch Powell’s tone on Friday.
- Gold has risen by 21% so far this year.
Gold prices pulled back on Wednesday after reaching new highs in the previous session due to Fed rate cut optimism. Investors are preparing to peruse the FOMC meeting minutes and a Fed Chair Jerome Powell speech.
Gold traders are optimistic that the Fed will start lowering borrowing costs in September. Last week, retail sales data revealed a still robust US economy, easing recession fears. However, consumer inflation figures aligned with expectations, increasing the chances of a 25-bps rate cut. Investors are still betting between a 50-bps and a 25-bps rate cut. However, they fully price in a rate reduction at the September meeting.
The FOMC meeting minutes due on Wednesday might further shape this outlook. They will show how policymakers voted on interest rates, their thoughts on inflation, and future policy moves. Dovish minutes will give gold prices another boost. On the other hand, if policymakers remained cautious, gold might pull back.
Meanwhile, Fed Chair Powell will speak on Friday, and market participants will watch his tone. If he signals a rate cut in September and more to come, it might cause a rally in gold. However, experts believe the market is currently overly dovish. Therefore, there is a high likelihood that Powell’s speech will be less dovish, leading to a slight pullback in prices.
Gold has risen by 21% so far this year. The catalysts behind this rally were China’s central bank demand, Middle East tensions, and rate-cut optimism. Most of these factors are still in play and will likely keep gold expensive.
China gold imports (Source: China Customs)
Notably, China’s gold imports have fallen from highs due to record prices. Nevertheless, after a short pause, gold import quotas are back in the country. China’s central bank had purchased a lot of gold when the year began. However, as prices increased, gold became too expensive, leading to a pause in purchases. If the central bank resumes its gold consumption, demand will increase, boosting prices.
Meanwhile, Middle East tensions remain alive, with the war now including Iran. The risk of an escalation has kept safe-haven inflows high, supporting the yellow metal. Finally, most major central banks have started their rate-cutting cycles, increasing demand for gold. Lower borrowing costs reduce the opportunity cost of holding bullion.
