Gold strengthens on sentiment U.S. Fed may pause rate hikes, but upside price momentum seen limited

Gold notched up its biggest weekly gain since April in the second week of July after signs the United States may be getting to grips with inflation, boosted sentiment over a possible pause in interest rate hikes.

While the outlook for gold prices appears moderately bullish coinciding with a softening U.S. dollar, the potential upside in gold prices may be limited until it becomes clear that inflation in the world’s largest economy is well under control.

Spot gold fell 0.1% to $1,959.27 per ounce on July 14, but had risen about 1.8% during the week.

Gold hit its highest since June 16 in the second week of July after U.S. consumer prices in June registered their smallest annual rise in over two years, raising expectations the Federal Reserve (Fed) could soon end its rate-hike cycle.

While gold prices have room to go higher in the coming days, analysts do not expect to see a major rally.

Daniel Pavilonis, senior market strategist at RJO Futures, told Kitco News that while weak inflation data will continue to underpin gold prices, there are good reasons why investors should be cautious at these levels.

He added that many investors remained on the sidelines, waiting for the Fed to signal that it is ready to stop raising interest rates. He noted that there still isn’t enough information to give a definitive answer on interest rates.

However, Pavilonis said that once it’s clear the Fed has finished raising interest rates, gold could easily take off.

“Gold still looks attractive at these levels because, in a neutral rate environment, there are other factors that can drive gold prices. Once the Fed is done raising interest rates, investors will turn to gold as a safe-haven or geopolitical hedge.”

For UK-based gold savers, the strengthening of the pound against the dollar, in which bullion is denominated, has made the yellow metal more affordable.

Expectations that the Bank of England may have to raise interest rates by more than other central banks, including the Fed, due to what appears to be stickier inflation in the UK, fed by substantial wage rise agreements, has given a short-term upwards push to the value of sterling against the dollar.

However, the UK faces rising recession risks as inflation endures, and as the Bank of England looks likely to have to keep on raising interest rates: a weakening UK economy could drag on the value of the pound in the longer term.