The price of Gold continues to rise after the Fed’s dovish stance

  • The price of gold points to further increases in the face of the Fed’s surprising dovish turn.
  • The Fed is expected to achieve a “soft landing” amid stable labor market projections.
  • Gold investors ignored bullish retail sales data in the United States.

The price of Gold (XAU/USD) remains stable despite the US Census Bureau reporting upbeat monthly retail sales data for November. Surprisingly, US consumer spending grew by 0.3%, while market participants were forecasting a 0.1% contraction. In October, this economic data contracted 0.2%. Consumers spent heavily on cars, which boosted overall retail sales. Economic data appears insufficient to influence the overall strength of the Gold price, as the dovish guidance from the Federal Reserve (Fed) has provided support to its fundamentals, potentially in the long term.

The precious metal is expected to add further gains as new Fed projections support more rate cuts than previously estimated, due to significant progress in lowering inflation towards 2%, labor market stability and the reduction of inflation projections.

Despite rate cut projections and lower inflation guidance, Fed Chair Jerome Powell did not announce victory over inflation. However, a “soft landing” by the Fed is widely anticipated as it is expected to achieve price stability without affecting the labor market and triggering a recession.

Daily Market Summary: Gold Price Remains Strong Despite Good US Retail Sales Data

  • Gold price remains largely unchanged following encouraging retail sales data as overall sentiment remains strong.
  • The general sentiment for the price of Gold is bullish, as Fed Chair Jerome Powell surprised with a dovish guidance on Wednesday.
  • Jerome Powell talked about cutting interest rates in 2024 after keeping interest rates unchanged in the 5.25%-5.50% range for the third consecutive monetary policy meeting.
  • The decision to keep interest rates stable was widely anticipated. It was the mention of reducing borrowing costs in 2024, while new economic projections were announced, which fueled demand for risk-sensitive assets and Gold.
  • Powell’s comment indicated that the Fed’s rate tightening campaign has come to an end amid progress in lowering inflation toward 2%.
  • According to the Fed’s new Summary of Economic Projections (SEP), core Personal Consumption Expenditure (PCE), which excludes oil and food prices and is considered a better indicator of underlying inflation, will decline to 3.2 % by the end of 2023 from the previous estimate of 3.7%.
  • For 2024 and 2025, the core CPI will be 2.4% and 2.2%, compared to 2.6% and 2.3% previously forecast.
  • Regarding interest rate forecasts, the Fed sees interest rates falling to 4.6% in 2024 through three rate cuts, down from previous forecasts of 5.1% and two rate cuts. By 2025, interest rates are expected to decline to 3.6%, down from 3.9% previously forecast.
  • The Fed’s outlook for the unemployment rate remains at 4.1% for 2024 and 2025.
  • Despite announcing more rate cuts in the coming years, Powell stopped short of declaring a complete victory over inflation. He said: “It would be premature, and we can have no guarantees on this progress.”
  • Meanwhile, a sustained decline in inflation in the US economy coupled with an unchanged outlook for the labor market indicates that the Fed will achieve a “soft landing.”
  • The US Dollar Index (DXY) fell to a five-month low of around 102.45 following the Fed’s sudden dovish change in stance.
  • Meanwhile, US 10-year Treasury yields fell sharply below 4% due to improving risk-taking capacity of market participants.
  • On Friday, preliminary PMI data from S&P Global will keep investors busy. According to the consensus, the Manufacturing PMI would decline slightly to 49.3, compared to the previous release of 49.4. The services PMI is expected to fall to 50.6, but will remain above the 50.0 threshold.

Technical Analysis: The price of Gold has difficulty exceeding $2,040

Gold price is trading near a weekly high around $2,040 after recovering from the 50-day exponential moving average (EMA). The precious metal is expected to extend its recovery towards the crucial resistance of $2,050. The main resistances for the price of Gold are $2,100 and $2,150.

The Relative Strength Index (RSI) (14) has bounced to near 600. If the RSI (14) manages to rise above 60, the Gold bulls will strengthen further.

Frequently asked questions about Gold

Why invest in Gold?

Gold has played a fundamental role in human history, as it has been widely used as a store of value and medium of exchange. Today, aside from its brilliance and use for jewelry, the precious metal is considered a safe-haven asset, meaning it is considered a good investment in turbulent times. Gold is also considered a hedge against inflation and currency depreciation, since it does not depend on any specific issuer or government.

Who buys more Gold?

Central banks are the largest holders of Gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase Gold to improve the perception of strength of the economy and currency. High Gold reserves can be a source of confidence for the solvency of a country. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the largest annual purchase since records exist. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.

What correlation does Gold have with other assets?

Gold has an inverse correlation with the US Dollar and US Treasuries, which are the main reserve and safe haven assets. When the Dollar depreciates, the price of Gold tends to rise, allowing investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken the price of Gold, while sell-offs in riskier markets tend to favor the precious metal.

What does the price of Gold depend on?

The price of Gold can move due to a wide range of factors. Geopolitical instability or fear of a deep recession can cause the price of Gold to rise rapidly due to its status as a safe haven asset. As a non-yielding asset, the price of Gold tends to rise when interest rates fall, while rising money prices tend to weigh down the yellow metal. Still, most of the moves depend on how the US Dollar (USD) performs, as the asset is traded in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold in check, while a weaker Dollar is likely to push up Gold prices.

Source: Fx Street

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