Gold prices increase despite pressure from the FED

At the first meeting of 2025, the FED decided to keep interest rates unchanged and no longer showed any signs of a sharp cut as previously expected.

Minutes from the January 28-29 monetary policy meeting show that the Fed may only cut interest rates once this year, with a reduction of 0.25 percentage points. The Fed had previously forecast four cuts in 2025.

In addition, contract interest rates in the market are still higher than the average forecast of the FED in December 2024. A survey also shows that many investors believe that interest rates will be kept higher longer before starting to cool down.

However, in the long term, investors and the market's forecasts are not consistent. This difference can be caused by a number of factors such as different calculated risk levels or imbalances in how the market reacts.

Although members of the Federal Open Market Committee (FOMC) admitted that inflation has cooled down compared to last year, they are still concerned about price movements. Some members said that inflation in the past 12 months has looked high due to the impact of the sudden increase in early 2024. When looking at a shorter period of time such as 3, 6 or 9 months, the bearish trend seems clearer.

However, many members still emphasized that more evidence of real sustainable inflation reduction to the 2% target is needed before considering cutting interest rates.

The minutes also showed that the FED is in no rush to adjust monetary policy. Members believe the economy is still stable and current policies are enough to control inflation. They want to wait for more data before making a decision, instead of setting a fixed interest rate cut roadmap.

After the news was released, the gold market reacted negatively and fell to $2,927.08/ounce (down 0.28% on the day). However, the precious metal quickly regained its upward momentum.

Normally, when the Fed maintains high interest rates or shows a tough stance, gold prices tend to decrease due to increased opportunity costs of holding gold - a non-interest-bearing asset. However, in this case, gold prices still recorded an increase, reflecting the market sentiment being dominated by many other factors.

One of the reasons for the increase in gold prices is the fear of inflation not being completely controlled. Although the Fed admitted that inflation has cooled down compared to last year, many FOMC members still emphasized that more data is needed to confirm this trend. If inflation continues to remain high or decline more slowly than expected, gold will become an attractive defensive asset for investors.

The Fed's long-term holding of high interest rates could also increase the risk of an economic recession. High interest rates increase borrowing costs, thereby holding back economic growth and putting pressure on the labor market. In this context, investors tend to seek gold as a safe haven, supporting gold prices to increase despite loose monetary policy.

In addition to macro factors, demand for gold from central banks also plays an important role in the price increase. According to recent data, many central banks in the world, especially China, continue to buy gold to diversify foreign exchange reserves. Cash flow from investment funds also tends to return to gold as instability increases.

Although the FED is cautious, the USD did not increase as strongly as expected, but even showed signs of weakening slightly as the market is reassessing the monetary policy outlook. A weakening US dollar will increase the attractiveness of gold to investors holding other currencies, thereby pushing gold prices higher.