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Why Might Gold Be Rising?

Carolane de Palmas | Tuesday 20 February 2024

While Gold (XAU) is down almost 2.04% since the beginning of the year and as of the time of the writing, many analysts believe that the commodity will finish higher by the end of the year. 

At the beginning of the month, UBS Group (UBSG) forecast Gold to reach $2,200 per ounce by the end of 2024. Additionally, yesterday, Monday, February 19, CNBC reported that Citigroup (C) expected the price of the yellow metal to soar and potentially reach $3,000 per ounce by mid-2025. 

Why do these experts believe that Gold could rise? Let’s have a closer look:

An illustration of rising gold price charts

3 Reasons Why the Price of Gold Might Keep Rising in 2024

Higher for Longer Interest Rates in the US

Gold is primarily influenced by the value of the US dollar, as the precious metal is priced in USD on the international markets. 

Therefore, when the USD strengthens against its peers, it becomes more expensive for buyers with foreign currency to purchase the commodity, which usually weighs on the demand for Gold. On the other hand, when the USD weakens, then the commodity becomes more affordable for foreign buyers, which tends to support Gold demand. 

The main driver of the USD is the changes in the Federal Reserve’s (FED) monetary policy, especially when it comes to interest rates, as they influence the value and the amount of money available in the American economy. Typically, when interest rates move higher, then the value of the given currency goes up, as the return on investment in this currency is higher compared to other economies — and vice-versa.

While the December Fed’s dot plots showed that most FOMC members were expecting the Federal Fund Rates (Fed Funds) to be cut 3 times in 2024 — and market participants were extremely optimistic about potential rate cuts in the United States arriving as early as March, recent economic data tempered this optimism, as inflation doesn’t seem to be cooling down towards the Fed’s 2% target as quickly as previously believed.

That may be why expectations of the first-rate cut are being pushed back to the second half of 2024, with 53.2% of analysts expecting a cut in the 5-5.25% range (from 5.25-5.50%) at the June meeting. But any new worse-than-expected economic data could postpone the start of the US rate cuts, which could support Gold prices.

Increasing Central Banks’ Gold Purchase

As exhibited by the World Gold Council’s latest report on Gold demand released on January 31, central banks have been increasingly buying Gold over the last few years (and they’ve been net buyers since 2010). While 2022 was the biggest year since 2010 in terms of annual net purchases with a demand of 1,081t, the amount of 1,037t reached in 2023 isn’t far behind, with China (Mainland), Singapore, and the Czech Republic being the largest central banks’ Gold buyers.

A Potential Global Stagflation

The risk of stagnation (slow economic growth, high inflation, and rising unemployment) in many countries, especially where interest rates have been quickly rising over the last few years, is increasing, as an “economic soft landing” seems unlikely, according to some experts like Robert Kahn, a former Fed Board member. In that case, Gold could play its role as a safe-haven asset sought in times of higher uncertainty due to the flight-to-safety phenomenon. (Source: CBS News)

Gold Technical Analysis Snapshot

At the time of writing, Gold is slightly up for the 4th consecutive day, trading at $2,021.62, with a positive Relative Strength Index (RSI) currently hovering around its neutral level of 50. If Gold keeps moving up, prices might be moving towards a significant resistance zone around $2,056.82. If the commodity decides to halt its winning streak to move back down, it is likely to be trading in the direction of the next support level at around $2,006.74.

Conclusion

We've talked about three reasons why Gold might keep going up in 2024, but traders should also know that the precious metal could also go down. There are indeed factors that might weigh on its price — one example being if the Fed decides to accelerate its rate cuts more than expected due to stronger-than-expected US growth. All eyes will be on Wednesday’s FOMC minutes, as they are likely to trigger higher volatility on Gold.


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