Gold traders continue to remain optimistic going into another trading day where the price of gold looks solid again, and it seems that the yellow metal is well on track to close another week in positive territory, which will make five consecutive weeks of gains for shinning metal. While speculators continue to push the price of gold higher, traders are paying very close attention to the fundamentals and are wondering how far the rally will go given the circumstances.
Background
The yellow metal has experienced a stellar start for 2024, where the momentum has been on a one-way road and the direction of the travel has been to the upside. Going into 2024, it was widely anticipated that gold will continue to shine, as the Fed is likely to push the interest rate given the progress that was seen in US inflation data in 2023. However, the recent readings from the US in terms of its inflation have changed the narrative among the main stream, which believes that the best-case scenario by year-end will be a 100 basis point interest rate.
The Change
The narrative has swayed from its extreme point among the gold bulls who were betting on the Fed to lower interest rates because inflation has taken a wrong turn. As per the last reading of the US CPI number, it has become more clear that inflation will remain in place for an extended period of time, and the only thing that needs to be moved from its arbitrary level is the Fed’s inflation target, which many have deemed to be wrong, and the Fed themselves have also indicated that the model is outdated.
So the bets in the markets have started to increase on the fact that the Fed will increase their inflation target somewhat to 2.5%, which will make it easier for them to justify the need for interest rate cuts. Having said this, the Fed is under no pressure to cut interest rates, as Jerome Powell said yesterday that rates can stay higher for longer. That has spooked markets even further, but if you look at the gold price, it is trading higher today. From a traditional or theoretical point of view, that would look odd, and this is because the gold price generally moves lower when the Fed delivers its hawkish stance. And the gold price moves higher when the Fed talks dovishly.
However, this time the change in the current and the most famous correlation between the dollar index and the gold price is based on the fact that traders think that the Fed is actually bluffing and they have limited options but to lower the rate. One way that they can do this is by raising their own interest rate target.
Among other things, the on-going geopolitical tensions between Iran and Israel are still providing some tailwinds for the gold price and keeping the price moving north.
Wall Street giants like Citi have already increased the target price for gold to reach $3,000 by 2024. The target, which seemed highly unrealistic, seems more and more likely in light of the geopolitical tension, investors looking for a hedge against inflation, which seems to be staying for a long period of time or even becoming a new reality, and the fact that the US could be printing more money as 2024 is the election year—above all, the fact that the Fed will have no other option but to increase their inflation target, which means that interest rates will move and the old and good correlation between the gold price and the Fed's monetary policy will move towards its mean.
In the short term and from a price point perspective, the levels shown on the chart below are very much in focus among traders and investors.
