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.
Frequently asked questions
Why did gold prices experience a weekly surge in July 2023?
Gold experienced its biggest weekly gain since April in the second week of July 2023 due to growing expectations that the US Federal Reserve might pause its interest rate hikes. This positive sentiment was triggered by signs that the United States is beginning to manage its inflation issues, marked by June consumer prices registering their smallest annual rise in more than two years.
As inflation cooled, spot gold rose by approximately 1.8% over the week, reaching its highest level since mid-June. A softening US dollar also contributed to this moderately bullish outlook for the precious metal. However, market analysts warned that further upside momentum for gold prices could remain limited until it is entirely clear that inflation in the world’s largest economy has been brought fully under control, preventing a major price rally for the time being.
What is holding investors back from driving a major gold rally?
Many investors are currently remaining on the sidelines because they are waiting for a definitive signal from the Federal Reserve that it is ready to stop raising interest rates. According to market experts, there is still not enough economic information available to provide a certain answer regarding the future path of US interest rates, which is causing cautious behaviour at current price levels.
While weak inflation data continues to underpin the price of gold, a major rally is unlikely to occur until this rate uncertainty is resolved. Once the Federal Reserve explicitly indicates it has finished raising interest rates, gold is expected to take off. In a neutral rate environment, investor attention is predicted to shift back to gold as a safe-haven asset and a hedge against geopolitical risks, which will act as a major catalyst for price growth.
How does the strength of the British pound affect gold buyers in the UK?
The strengthening of the British pound against the US dollar has made gold more affordable for UK-based gold savers. Because bullion is globally denominated in US dollars, a stronger pound means that UK buyers can purchase more gold for the same amount of sterling, giving them a temporary purchasing power advantage in the international market.
This short-term upward push in the value of the pound has been driven by expectations that the Bank of England will need to raise interest rates more aggressively than other central banks, including the Federal Reserve. This aggressive stance is a response to stickier inflation within the United Kingdom, which is currently being fuelled by substantial wage rise agreements. Consequently, British buyers are seeing a favourable window to acquire the precious metal at a lower relative cost.
Why is the UK economy facing rising recession risks?
The United Kingdom is facing rising recession risks due to enduringly high inflation and the Bank of England’s likely response of continuing to raise interest rates. Unlike other economies where inflation may be cooling faster, the UK is experiencing stickier inflation that is being continuously fed by substantial wage rise agreements across various sectors of the economy.
To combat this persistent inflation, the Bank of England is expected to keep raising interest rates, which increases borrowing costs for businesses and consumers alike. While these rate hikes have temporarily strengthened the pound against the US dollar, the resulting economic strain of high rates is highly likely to drag on the UK economy in the longer term. This economic weakening could ultimately reverse the currency’s recent gains and impact the broader financial stability of the country.
What was the price of spot gold in mid-July 2023?
Spot gold fell slightly by 0.1% to settle at $1,959.27 per ounce on July 14, 2023. Despite this minor daily decline at the end of the week, the precious metal had still managed to gain approximately 1.8% overall during that specific weekly trading period. This performance marked the most significant weekly gain for gold since April of the same year.
The price rally during the second week of July was sparked by highly anticipated US economic data showing a slowdown in consumer price inflation. This cooling inflation raised market expectations that the Federal Reserve might soon halt its aggressive rate-hiking cycle. The combination of these factors pushed gold to its highest price level since June 16, highlighting a period of renewed, though cautious, investor optimism in the gold market.
