On Wednesday, the price of gold (XAU/USD) rose, gaining approximately half a percent and reaching the $2,360s range. This uptrend is attributed to ongoing accumulation by central banks amid lingering geopolitical uncertainties, which bolster demand for the precious metal.
However, the upside potential may be limited due to remarks made by Federal Reserve (Fed) Chairman Jerome Powell. Powell suggested that elevated interest rates are likely to persist, thereby maintaining the opportunity cost of holding gold, which does not yield interest, relatively unattractive.
Gold Price Inches Upward on Sustained Demand
Gold prices edged higher on Wednesday, supported by a positive demand outlook for the precious metal amidst ongoing geopolitical tensions and global trade uncertainties.
According to Gita Gopinath, the First Deputy Managing Director of the International Monetary Fund (IMF), central banks, particularly in emerging markets, have been increasingly accumulating gold as a hedge against various risks, including potential sanctions from Western nations.
Gopinath mentioned in a recent speech at Stanford that gold purchases by central banks may be driven by concerns over the risk of sanctions. This aligns with a recent IMF study, which found that foreign exchange reserve managers tend to increase their gold holdings to mitigate economic uncertainty and geopolitical risks, including the threat of sanctions.
Data from the World Gold Council (WGC) also supports this view, indicating robust demand from central banks in 2024.
With heightened tensions in regions like the Middle East and Ukraine, as well as escalating geopolitical disputes between BRICS nations and US-led allies, the trend of central banks accumulating gold is expected to persist, providing continued support to gold prices.
US Inflation Data Awaited
The price of gold is expected to be influenced by the release of US Consumer Price Index (CPI) data scheduled for Wednesday, as it plays a significant role in determining US interest rates. If the CPI data indicates an increase in inflation, it could prompt the Federal Reserve to maintain or even raise interest rates for a longer period, which typically has a negative impact on the value of gold, as it doesn’t offer interest payments.
In a speech delivered on Tuesday, Federal Reserve Chairman Jerome Powell hinted at the likelihood of interest rates remaining elevated for an extended duration. Powell remarked, “Inflation in the first quarter showed limited progress,” emphasizing the need for patience and allowing policy measures to take effect.
Although the Federal Reserve had previously considered multiple rate cuts throughout 2024, recent statements from various Fed officials, including Powell, indicate a shift in approach. Now, there’s a consensus among officials that maintaining current interest rates is necessary to achieve sustainable inflation reduction. This shift is expected to pose a challenge for gold as it attempts to rise in value.
Technical Analysis: Gold Price Rebounds Following Decline
The price of gold (XAU/USD) has bounced back, reaching nearly the same level as the highs seen in May around $2,379, following a period of finding support and continuing its recent short-term upward trend.
XAU/USD 4-Hour Chart Analysis
Considering the age-old adage “the trend is your friend,” gold is anticipated to persist in its upward trajectory, with the subsequent objective lying approximately at $2,400, roughly corresponding to the highs seen in April. Further validation would be provided by a breach above the May 10 high of $2,378.
Moreover, the medium and long-term charts, particularly the daily and weekly ones, also exhibit bullish signals, offering additional support to gold’s upward momentum.
