Gold prices have been trading in a narrow range for the past two weeks, as the market awaits more clarity on the Federal Reserve’s monetary policy stance. The U.S. central bank has signaled that it will start tapering its bond-buying program later this year, and possibly raise interest rates in 2023, depending on the economic data. This has increased the opportunity cost of holding gold, which does not pay any interest or dividends.
Gold is traditionally seen as a safe-haven asset that can hedge against inflation, currency devaluation, and geopolitical risks. However, in the current environment, gold faces competition from other assets that offer similar or better returns. For example, the U.S. dollar has been strengthening against other major currencies, as the U.S. economy outperforms its peers and attracts capital inflows. The U.S. 10-year Treasury yield has also risen above 3%, making bonds more attractive for investors seeking income and safety.
Another factor that has reduced the demand for gold is the resilience of the stock market, which has been hitting new record highs despite the uncertainty surrounding the pandemic, the delta variant, and the global supply chain disruptions. Investors have been optimistic about the corporate earnings, the fiscal stimulus, and the vaccine rollout, and have shrugged off the negative news. This has reduced the need for a hedge against market volatility and risk aversion.
Gold Awaits A New Catalyst To Break Out Of The Range
While gold has been struggling to find a direction, analysts say that there are still plenty of triggers that could spark a rally in the precious metal. Some of the potential catalysts are:
- A slowdown in the U.S. economic recovery, which could force the Fed to delay or scale back its tapering plans and keep interest rates low for longer. This could weaken the dollar and boost gold’s appeal as an alternative currency.
- A surge in inflation, which could erode the real value of bonds and cash, and increase the demand for gold as an inflation hedge. The U.S. consumer price index (CPI) rose by 5.4% year-on-year in July, the highest level since 2008.
- A geopolitical crisis, such as a conflict between the U.S. and China over Taiwan, or a military escalation in Afghanistan, which could increase the uncertainty and risk aversion in the market, and drive investors to seek refuge in gold.
- A technical breakout, which could attract more buyers and momentum traders to join the rally. Gold is currently trading near the upper end of its range, around $1,950 an ounce. If it can break above this level, it could target the next resistance at $2,000 an ounce, which is also a psychological barrier.
