(Kitco News) - The gold market’s push to a new record high above $2,500 an ounce remains well supported as the U.S. dollar continues to lose significant ground, according to some analysts.
As gold continues its unprecedented run, the U.S. dollar has dropped to its lowest level since the start of the year, testing critical support at 101 points. The U.S. dollar index, which measures the greenback against a broad basket of global currencies, has fallen more than 2% since the start of the month.
Since July, as markets started aggressively pricing in rate cuts in the second half of the year, the greenback has lost about 4% of its value.
Some analysts expect that this is just the beginning of the U.S. dollar’s slide as the Federal Reserve looks to start cutting interest rates at its monetary policy meeting next month. According to the CME FedWatch Tool, markets have fully priced in a 25-basis point cut and see a 32% chance of a 50-basis point move.
Shivaan Tandon, market economist at Capital Economics, said that this is the start of broader weakness in the U.S. dollar. The British research firm sees the U.S. dollar index falling to 98 points by the end of 2025.
“With the Fed set to finally start loosening policy and a soft landing still looking like the most probable outcome for the U.S. economy, we think unfavorable rate differentials and continued robust risk appetite will lead to some further weakness in the U.S. dollar over the next couple of years,” Tandon said in a note on Wednesday.
However, the firm’s outlook is not without risks. Although a growing number of economists see a recession as an unlikely scenario, Capital Economics sees it as one factor that would support the U.S. dollar.
“If the U.S. economy were to enter a full-blown recession, we would expect that to eventually drag down the rest of the global economy as well. In that scenario, safe-haven dynamics would probably take over and lead to another bout of dollar strength,” Tandon said.
For many economists and commodity analysts, the real test for gold will come Friday with Federal Reserve Chair Jerome Powell’s annual speech at the Jackson Hole Central Bank Symposium.
“The Fed chairman is expected to address concerns over the slowing U.S. economy, particularly in the labor market, and the progress made in curbing inflation. Powell’s keynote is anticipated to serve as the launchpad for the Federal Reserve’s rate-cutting cycle, set to begin in September,” said Ricardo Evangelista, Senior Analyst at ActivTrades, in a note. “If confirmed, these developments may lead to further weakness in Treasury yields and a softer dollar, with gold prices potentially reaching new highs.”
While there is significant bullish sentiment in the gold market as the U.S. dollar tests important support levels, some analysts are not convinced that these trends in the marketplace are sustainable.
Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank, said that the market’s dovish expectations surrounding the Federal Reserve’s monetary policy could be overdone, which could put some pressure on gold.
“The dovish Fed expectations look overpriced, and the RSI index suggests that gold is about to step into overbought territory, where a correction could be healthy at the current levels,” she said.
Currency analysts at Brown Brothers Harriman said they see the U.S. dollar as oversold in the near term.
“While Powell is widely expected to signal a September cut in his Jackson Hole speech, we continue to believe that markets are once again getting carried away with their pricing for aggressive easing,” the analysts said. “Dollar bears could get caught flat-footed by a less dovish message from Powell this Friday. We believe the balance of risks currently calls for a 25 bp cut, not 50 bp. Powell should stress a data-dependent approach to easing and not pre-commit to any rate path going forward.”
However, even if the U.S. dollar does see some bullish volatility in the near term, analysts continue to see solid support for gold, which remains a buy on dips.
