Gold Prices Remain Supported by Strong Fundamentals

By Priyanka Sachdeva, Senior Market Analyst for Phillip Nova

Gold experienced a significant surge last week, spurred by a notable decline in the US Dollar. This upswing in 2024 highlights Gold’s appeal as a safe-haven asset following substantial acquisitions by global Central Banks despite a backdrop of persistent inflation. Despite the higher interest rate environment, Gold has attracted considerable investment interest. However, after peaking at $2488.40 per ounce on 17 July 2024, the price quickly corrected as momentum indicators signalled an overextended rally.

Market speculation is rife regarding a possible dovish shift to the Federal Reserve’s position, the speculation is further exacerbated by the ongoing decrease in US inflation. This has led to hopes that the Fed might start reducing terminal rates in September, thus potentially making Gold more attractive. Additionally, New York Fed President Bill Dudley has suggested that the Fed could cut rates as early as next week due to recession concerns, noting that the Fed’s efforts to cool the economy are showing progress. This sentiment aligns with recent remarks by Fed Chair Jerome Powell, who emphasised that “elevated inflation is not the only risk we face.”

Whether or not the Fed will surprise the market with a rate cut, economic concerns are escalating as prolonged “monetary tightening” could quickly lead to a recession. So far, Fed officials have skilfully managed to keep a balanced approach.

From a technical standpoint, Gold’s trend remains positive, marked by higher highs and higher lows within an upward channel. As long as no new lower lows are established, the trend is likely to continue upward. If Gold bulls push prices higher, the metal might revisit its May high of $2450, which poses an immediate resistance level before potentially reaching $2500. On the downside, Gold has support at the 50-Day Simple Moving Average of $2372 per ounce (S1) and the 100-Day Simple Moving Average of $2333 per ounce (S2). For the bullish trend to persist, one of these support levels must hold.

Although the market is adjusting to the recent decline and consolidation around $2400 per ounce, investors are looking for confirmation that the bullish trend will resume at current levels. Despite short-term fluctuations, the long-term outlook for Gold remains positive, supported by factors such as Central Bank purchases, potential Fed rate cuts, and ongoing geopolitical tensions in the Middle East. Investment sentiment in Gold is strong due to increased momentum.

In the latest Union Budget, India has reduced its import tax on Gold, perfectly timed for the festive season, which is expected to boost consumer demand. Gold is highly valued in India not only for industrial and investment purposes but also for its cultural significance. As a major global gold buyer, India’s reduction of the import duty to 6% is likely to drive strong global demand for bullion.

Gold’s enduring appeal as a safe-haven asset has consistently driven up its prices amid geopolitical uncertainties. However, for Gold to sustain its upward trajectory, a significant catalyst is needed. Actions by the Fed could play a crucial role in this regard. Gold’s investment appeal often shines brightest when Treasury yields decline, reducing the opportunity cost of holding the metal.

In summary, the fundamentals support a bullish outlook, but overlooking economic data could be risky. The second half of 2024 is anticipated to be volatile, with the US election in the final quarter adding to the uncertainty. Political instability in the US, a potential ceasefire in Gaza, and a slow recovery in mainland China all have the potential to affect financial markets. Additionally, the strength of the US Dollar against a basket of currencies could pose risks to Gold.

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