Gold prices witnessed a slight decline during trading on Tuesday, after a slight recovery in the US dollar index. Despite this decline, losses were limited by investor optimism about the possibility of a US interest rate cut soon, as well as ongoing concerns regarding the crisis in the Middle East.
The impact of the dollar index on gold prices: The rise in the dollar index against other currencies has made gold less attractive to foreign currency holders. With the dollar rising, gold becomes more expensive for international investors, which contributes to the decline in prices. However, investor optimism about US interest rate cuts and concerns about geopolitical crises continued to weigh heavily on the market.
US interest rate cut expectations: According to the market strategist at IG, a US interest rate cut in September is considered highly likely. However, discussions about the size of the expected cut are raising anticipation among investors, who are looking forward to upcoming economic data to determine the exact size of the cut.
Expectations indicate a 70% chance of a 25 basis point rate cut, while others expect a 30% larger cut of 50 basis points. According to the US interest rate tracking tool available on the Investing Saudi platform, these expectations contribute to determining the future trends of the gold markets.
The impact of the low interest rate environment on the gold market: The low interest rate environment enhances the attractiveness of non-yielding bullion such as gold. Lower interest rates reduce the opportunity cost of holding gold, which supports higher prices. In this context, Mary Daly, President of the Federal Reserve Bank of San Francisco, expressed the likelihood of a quarter percentage point cut in borrowing costs at the bank’s next meeting.
Gold continues to rise after achieving gains for four weeks
On Monday, gold prices extended their gains, continuing their upward trend that began after achieving significant increases for four consecutive weeks. This rise was supported by the growing expectations of a rate cut by the Federal Reserve in September. At the close of the market, gold futures for December delivery rose by 0.35%, or $8.9, to reach $2,555.20 per ounce. This represents the seventh new record level recorded at the end of the session during the month of August.
Current gold and dollar prices: Overview : Spot gold fell by 0.4% to reach $2,507 per ounce. However, gold prices have risen by more than 21.5% this year, and recorded a record high of $2,531 on August 20. As for gold futures, they fell by 0.5% to reach $2,543.20. Impact of US Dollar Movement: In contrast, the US Dollar Index rose slightly by 0.05% to 100.9 points. This rise in the value of the dollar could affect the attractiveness of gold as an alternative investment.
Movement of other metals
- Silver: Silver in spot transactions recorded an increase of 0.1% to reach $29.93 per ounce.
- Palladium: Palladium prices rose by 0.1% to reach $959.90 per ounce.
Markets continue to monitor economic and political developments that affect precious metal prices, including potential moves in monetary policy.
Gold Future Price Forecast: Analysts expect the bullish trend in gold prices to continue, based on its positive performance during previous interest rate easing cycles by the Federal Reserve. This expectation is also attributed to healthy demand from central banks and gold’s status as a strong hedge against geopolitical and economic risks. Ultimately, gold continues to benefit from the current economic environment that is witnessing ongoing concerns about geopolitical crises, along with expectations of lower interest rates. A careful analysis of changes in monetary policy
Factors supported gold prices through a weaker dollar and easing monetary policy.
Factors supporting gold prices: The positive tone around gold prices is attributed to the continued decline in the US dollar and negative yields on US Treasury bonds. These developments come after comments made by Federal Reserve Chairman Jerome Powell during the Jackson Hole Forum on Friday.
Federal Reserve Chairman’s Statements: Jerome Powell made it clear that the Fed’s monetary easing cycle will begin in September, noting that “the time has come to adjust policy.” Powell added that “the direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolution of the outlook, and the balance of risks.”
Powell also noted that “upside risks to inflation have diminished, while downside risks to employment have risen.” He stressed that the Fed is paying attention to risks affecting both sides of its dual mandate, as stated in its latest FOMC statement.
Market Expectations and Rate Cuts: Powell’s comments were enough to confirm market expectations of a rate cut by the Fed in September. Markets are currently pricing in a 38% chance of a 50bp rate cut, while the odds of a 25bp cut are 62%
The Impact of Monetary Policy on Gold Prices: Gold, which does not offer returns, benefits from a low interest rate environment. When interest rates fall, the returns on other investments decrease, enhancing gold’s appeal as a hedge against inflation and economic uncertainty. The weak US dollar, negative bond yields and expectations of rate cuts continue to support gold prices, reinforcing its position as a safe-haven investment in the current economic climate.
Gold prices remain vulnerable to upside risks, with technical setups on the daily chart also favoring buyers. The next upside in gold prices is likely to be driven by the highly influential US durable goods orders data.
