- The Israel-Hamas war has escalated since last week, with more strikes on vessels in the Red Sea.
- Gold prices got support from a decline in the dollar.
- The FOMC meeting minutes came in line with expectations.
Gold prices rose on Wednesday as Middle East tensions had investors looking for safety in the safe haven of yellow metal. Moreover, a decline in the dollar made gold cheaper for foreign buyers, increasing its demand.
Notably, the Israel-Hamas war has escalated since last week with more strikes on vessels in the Red Sea. Additionally, Israel is planning to execute more attacks on Palestinians that have raised concerns about a humanitarian crisis. As a result, members of the United Nations have been calling for a ceasefire in the Gaza war. Historically, gold has been considered a haven in times of geopolitical tension. Therefore, an escalation in the Israel-Hamas war increases the appeal of gold.
Moreover, gold prices got support from a decline in the dollar. The dollar fell after the FOMC meeting minutes came in line with expectations. There were no surprises in the minutes, which showed that most policymakers were worried about the risks of early rate cuts.
Reversing monetary policy is a delicate balance. If the Fed starts cutting rates before inflation is in a definite downtrend, it could flare up and rise again. This would eliminate most of the work done to bring down price growth. Consequently, policymakers remain cautious about starting rate cuts.
Additionally, the minutes revealed that policymakers were uncertain about how long they would hold current rates. This translates to uncertainty about the timing of the first rate cut.
Fed funds futures (Source: Bloomberg, Federal Reserve)
However, economists believe the first rate cut will come in June. This aligns with current market expectations converging with the Fed’s forecasts. The Fed forecasted about 75 bps of cuts in 2024. Meanwhile, markets had expected about 160 bps. However, this has dropped in recent months to 90bps.
Some experts believe that gold will likely rise since the Fed will neither raise nor cut rates. Other catalysts in the market, including safe-haven demand amid geopolitical tensions, could support gold.
Elsewhere, Goldman Sachs said that metals like gold and copper will rise significantly when the Fed starts cutting interest rates. For gold, which has no yield, high interest rates reduce its appeal compared to other assets. Therefore, decreasing interest rates would raise its appeal, leading to a price rally.
