Fundamental Analysis

Gold Prices Retreat as Fed Tempers Rate Cut Hopes

  • Fed policymakers believe inflation is still high.
  • Increasing US debt has raised concerns among investors.
  • Gold remains near recent highs due to rate cut optimism.

Gold prices pulled back slightly on Wednesday as Fed policymakers pushed back rate cut expectations. However, prices remained near the highs hit in the previous session due to increased demand and optimism about easing US inflation.

Fed policymakers have warned against the rising confidence that US inflation is back on a downtrend. Most of them have maintained that inflation is still high. As a result, the dollar strengthened slightly, making gold expensive for foreign customers. 

Gold (Source: Bloomberg)

Gold (Source: Bloomberg)

Still, prices remained near record highs and could continue higher due to rate cut optimism and rising demand for gold. Although policymakers are cautious, there is still optimism that, with lower inflation, the Fed is getting closer to cutting interest rates. Therefore, non-yielding gold will likely regain its appeal. 

The recent increase in demand has been due to several factors, including a weak dollar, rising US debt, central bank purchases, and geopolitical tensions. 

The dollar weakened after last week’s inflation report revealed slower inflation. This increased the chances that interest rates in the US would start declining. Lower interest rates reduce the dollar’s appeal, weakening it. This, in turn, makes commodities priced in dollars cheaper.

Meanwhile, increasing US debt has raised concerns among investors, who are diversifying their portfolios. As a result, more people are buying gold, which is considered a haven in uncertain times. The US budget deficit reached $1.7 trillion in 2023, and experts believe it could reach $2.6 trillion by 2034. The US uses more money to service loans than anything else. Such a scenario creates uncertainty among investors.

Furthermore, there are increased safe-haven inflows to gold after Iran’s President Raisi was confirmed to be dead on Monday. He died in a helicopter crash that has many speculating about the possible causes. The crash comes at a time of tension in the Middle East. Therefore, any developments in the region increase risk aversion among investors, and they prefer to buy safe-haven assets like gold.

Another source of demand for gold is central bank purchases. Notably, China’s central bank has consistently increased its gold holdings as it seeks to diversify. Moreover, with gold’s recent rally, some investors are buying due to the fear of missing out, which also puts upward pressure on prices.