The precious metal continues to benefit from safe-haven demand. Additionally, expectations are growing that the Federal Reserve will cut interest rates sooner than expected. Therefore, market conditions are becoming favorable for the gold market.
It is too early to see an exit rally in the gold price, but…
The gold market closed last week by testing the $2,050 resistance. It started the new week on a rise amid increasing geopolitical tensions. According to some analysts, the upward momentum has just begun to increase. Therefore, there is still room for the precious metal to rise further. The yellow metal managed to close the week with gains.
Analysts say investors should not be too disappointed as prices are well off the four-week lows seen earlier in the week. Ole Hansen, head of commodity strategy at Saxo Bank, says it is too early to see an breakout rally. However, he notes that investors should not fight the bullish momentum. In this context, Hansen points to the following levels for the gold price:
The strong rejection from key support earlier in the week has certainly reignited belief in higher gold prices. From an RSI perspective, gold is nowhere near overextended. Therefore, if it manages to break $2,064, we can next look at $2,088.
Traders are running to safety!
Investors sought some portfolio insurance ahead of last weekend amid growing turmoil in the Middle East. Thus, gold is gaining renewed interest from safe-haven demand. Gold’s rise came after US and British warplanes, ships and submarines launched dozens of airstrikes in Yemen overnight in retaliation for Houthi forces who launched months-long attacks on cargo ships in the Red Sea.
Tension continues to escalate due to the ongoing war between Israel and Hamas in Gaza. “Traders are running to safety now that the UK and US are going all out,” said Naeem Aslam, chief investment officer at Zaye Capital Markets.
Fed expectations create a tailwind for gold
At the same time, gold is also benefiting from rising expectations that the Federal Reserve will cut interest rates as early as March. cryptokoin.comAs you follow from , the Fed signaled that it foresees three interest rate cuts this year. However, markets continue to price in aggressive rate cuts. Markets see a roughly 80% chance of easing in March, according to the CME FedWatch Tool. This time last week markets were pricing in a 64% chance. Meanwhile, the US Labor Department announced that the Producer Price Index decreased by 0.1% in December. After this, expectations rose on Friday. Although inflation remains relatively high, economists say weak producer prices indicate that consumer prices will fall. OANDA Senior Market Analyst Craig Erlam comments on the developments as follows:
It is understood from these data that disinflationary pressures continue. This will give the Fed confidence that inflation is moving towards target in the coming months. Markets are now almost fully pricing in not only a 150 basis point cut this year, but also a more than 50% chance of 175, with the first major support coming in March. Many people thought that the markets closed last year too bullish on interest rate cuts.
Erlam notes that rising market expectations have pushed the yield on US 10-year bonds below 4%. It also notes that 2-year bond yields fell to an eight-month low. The decline in bond yields creates a tailwind for gold. Although momentum is building, Erlam says the market still has a way to go to reach last month’s all-time highs.
This situation may lead to a decline in gold in the short term!
However, not all analysts are optimistic that gold prices will rise further. Economists at Commerzbank expect the Fed to cut interest rates only in May. German Bank commodity analyst Barbara Lambrecht makes the following statement:
A longer waiting period may lead to disappointment and a decline in gold prices in the short term. The ongoing outflows from gold ETFs also support this.
Data and event agenda of the week that the gold market will follow
Markets will continue to follow economic data closely. The most important report this week will be US individual sales. Meanwhile, world leaders will meet in Davos, Switzerland. According to analysts, this may increase geopolitical tension and support the safe haven appeal of gold. “U.S. retail sales may have grown solidly in December on consumer confidence supported by rising equity markets,” economists at ING wrote in a note.
- Tuesday: Empire State Survey.
- Wednesday: US individual sales.
- Thursday: Weekly unemployment claims. US housing starts. Philly Fed Survey.
- Friday: University of Michigan preliminary Consumer Sentiment; existing home sales.
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