Gold: The calm before the storm

The US Dollar has managed to find a floor thanks to strong business activity data in the manufacturing sector and a resurgence of market interest in artificial intelligence. The S&P 500 has approached a record high, with the three-day increase in the market capitalisation of the ‘Magnificent Seven’ proving to be the largest in history. Along with the resurgence of the AI boom, the theme of American exceptionalism has also returned.

Markets continue to discuss Kevin Warsh’s reforms. The Fed Chair wants rising Treasury yields to tighten financial conditions and curb inflation. Investors see that the central bank is in no hurry to raise rates and are increasing the risk premiums on Treasuries. Yields are rising. The Fed’s passivity is weakening the US dollar.

However, other FOMC members may not support the restructuring initiated by Kevin Warsh. John Williams, President of the Federal Reserve Bank of New York, noted that monetary policy is in the right place. But this is only because inflation is behaving as expected. If its behaviour changes, the central bank will be forced to make adjustments.

The uncertainty surrounding the Fed’s new approaches is affecting not only the dollar and Treasury yields, but also gold, which is closely linked to them. For the first time since February, the precious metal has closed the month in positive territory and is finding support in the de-escalation of the conflict in the Middle East. Although Iran maintains that it is not in talks with the US, it has noted progress in its dialogue with Oman regarding the reopening of the Strait of Hormuz. This reduces the risks of rising oil prices and accelerating inflation. If this is the case, the likelihood of the Federal Reserve tightening monetary policy should decrease.

Gold is finding support in Asia. Capital inflows into Chinese ETFs have now continued for the 14th consecutive day, as institutional investors snap up the precious metal as it approaches the psychologically significant level of $4,000 per ounce. Goldman Sachs believes that increased central bank buying of bullion is offsetting the negative impact of geopolitical tensions and rumours of a Fed rate hike. Citi forecasts that XAUUSD may stabilise at current levels or even fall. However, in the fourth quarter, gold is expected to return to the $4,500 mark.

Summary: Gold is consolidating near $4,000 as Fed uncertainty and strong Chinese demand provide support, with Citi forecasting a potential rally towards $4,500 later this year.