Is Gold Ready To Test All-Time Highs?

Key Insights

• Gold pulled back from May highs as Fed policy outlook changed. 
• Traders believe that Fed will raise rates at July meeting. 
• The last rate hike may serve as the key positive catalyst for gold markets as traders will start to prepare for future rate cuts. 

Back at the beginning of May, gold made an attempt to settle above the $2070 level but lost momentum and pulled back as traders focused on Fed’s rate hikes.

Geopolitical uncertainty and U.S. banking crisis provided material support to gold markets this year, but Fed’s hawkish policy was a big obstacle on the way to historic highs.

FedWatch Tool indicates that traders expect at 25 bps rate hike at the Fed meeting in July. The federal funds rate is projected to decline from 525 – 550 bps to 500 – 525 bps by the end of the year.

The Fed policy expectations have changed significantly in recent weeks. Previously, traders expected that the federal funds rate could move closer to the 400 bps level by the end of 2023.

The shift in Fed policy expectations pushed gold from $2070 to $1930, but it looks that gold markets could form a local bottom near the $1950 level, which may serve as a base for another test of historic highs.

While the Fed is expected to raise rates in July, traders expect that it will be the last rate hike. Thus, the main negative catalyst for gold will be gone – the Fed will be forced to cut rates sooner or later to provide additional support to the economy, as the current interest rates are already too high for many businesses.

Meanwhile, demand for gold from central banks will continue to grow as they seek to diversify their risks. China keeps buying gold for its reserves amid rising tensions with U.S., and this trend will not change anytime soon as the relations between the two countries get worse day by day.

In addition, high interest rates may trigger the second phase of the regional banking crisis in the U.S., as Fed’s policy puts too much pressure on the commercial real estate market. As usual, gold will serve as a safe-haven asset in this scenario.

At this point, it looks that gold has a good chance to gain strong upside momentum and move above the $2100 level after the Fed makes its last rate hike in July.

For a look at all of today’s economic events, check out our economic calendar.