Gold prices continued to face pressure in the last session of the week and are heading towards their third consecutive week of decline as the USD strengthens along with expectations that the US Federal Reserve (Fed) will maintain a tough monetary policy for a longer time.
The USD is on track to record a week of gains, making gold more expensive for investors holding other currencies.
Mr. Nikos Tzabouras - Senior Market Analyst at Tradu. com - said that gold is facing the risk of falling further and may fall below the important psychological milestone of 4,000 USD/ounce.
Expectations that the Fed will maintain high interest rates for a long time are a disadvantage for non-performing assets like gold, while supporting the USD," he said.
Pressure on precious metals increased after the Fed announced new economic forecasts. Accordingly, 9 out of 19 US central bank policymakers currently believe that interest rates need to continue to be raised this year. Previously, the Fed decided to keep interest rates unchanged in the range of 3.50% – 3.75%.
Data from the CME FedWatch tool shows that the market currently assesses about 70% of the possibility that the Fed will raise interest rates in September.
According to Mr. Tzabouras, the next developments in gold prices will depend on the negotiation process between the US and Iran, the US inflation report released next week, as well as how the market adjusts expectations for Fed policy.
Geopolitical factors continue to create mixed signals. Switzerland said that negotiations between the US and Iran to find an agreement to end the conflict in the Middle East will not take place on Friday as planned, after US Vice President JD Vance canceled his plan to visit this European country.
Meanwhile, a senior US official revealed to Reuters that Israel and Hezbollah have reached a ceasefire agreement, which will take effect from 1 pm GMT on Friday.
Faced with increasing short-term risks, Goldman Sachs has lowered its year-end gold price forecast to 4,900 USD/ounce from the previous 5,400 USD/ounce. However, the bank still maintains a positive outlook on the long-term outlook for the precious metal, while warning of the risk of short-term price declines, but the opportunity to increase prices in the medium term is still present.
However, not all experts believe that a tougher Fed will end the gold price winning cycle.
Mr. Axel Merk - Founder and CEO of Merk Investments - believes that investors should not assume that a Fed that focuses more on controlling inflation is a negative factor for gold in the long term.
According to Mr. Merk, new Fed Chairman Kevin Warsh may create a certain resistance to gold prices in the short term, but at the same time help reduce instability caused by monetary policy.
In the event that other factors remain unchanged, Kevin Warsh is a drag on gold prices. But I think that will help reduce volatility and this is a positive sign," he said.
Mr. Merk appreciated Mr. Warsh's efforts to reduce the Fed's dependence on forward guidance signals, while allowing the market to play a greater role in reflecting the actual economic conditions.
According to him, many years of the Fed continuously sending policy signals have made the market more distorted and volatile than necessary. Limiting major policy mistakes will significantly reduce volatility in the financial market.
Notably, Mr. Merk said that as attention to each Fed's statement or interest rate forecast decreases, investors may focus more on structural factors that support gold, especially the prolonged budget deficit and increasingly large US public debt.
For those who believe in gold, the core issue is still unsustainable deficits. The market should focus more on the fiscal aspect," he emphasized.
Mr. Merk also rejected the view that the opportunity cost from high interest rates is a decisive factor in holding gold. According to him, the precious metal is not only an investment asset but also plays a role in preserving purchasing power during periods of monetary instability, fiscal recession and geopolitical tensions.
In addition, he said that part of the recent pressure on gold comes from the correlation between gold prices and oil prices in the context of Middle East tensions. However, this link may weaken over time and become a new supporting factor for the gold market.
We should not simplify the story of gold investment into just interest rates" - Mr. Merk said. According to him, even if the Fed succeeds in controlling inflation, long-term challenges such as increased public debt, prolonged budget deficits and geopolitical risks will continue to be an important supporting foundation for gold prices in the coming years.
