Gold bulls could find themselves without much support once the current optimism in the market fizzles out, according to experts.
“No big moves are expected, as several traders sit on their hands until the Federal Reserve (Fed) interest rate decision later in the day,” Filip Lagaart, editor at FXstreet said.
Last week, gold prices had climbed sharply to trade near their record highs. The gains were on the back of increasing safe-haven demand due to uncertainty over US President Donald Trump’s tariff narrative and the weakening of the dollar.
The yellow metal had even remained resilient in the wake of a financial market meltdown earlier this week.
“Gold dropped around 1% (on Monday) as investors rushed to dump anything of value to raise funds in response to the US tech-led sell-off. But the loss was relatively modest when put in perspective with the broader market,” David Morrison, senior market analyst at Trade Nation, said.
The market patiently waits for the outcome of the US Federal Reserve’s policy decision later on Wednesday.
However, traders do not expect a rate cut from the US central bank at the meeting.
Trump’s tariff threats
Gold prices surged last week as the US dollar weakened due to the absence of the widely feared punitive tariffs during the initial days of President Trump’s administration.
The 25% tariffs on imports from Canada and Mexico, which Trump announced will go into effect on February 1st, are the only exception.
“This is likely to be a negotiating tactic, similar to the brief threat of tariffs against Colombia at the weekend,” Carsten Fritsch, commodity analyst at Commerzbank AG, said.
With the threat of tariffs subsiding, at least for the time being, market participants are again expecting the Fed to cut interest rates a little more.
Market expectations, as reflected by Fed funds futures, currently anticipate two 25 basis point interest rate cuts before the end of the year, with one of those cuts expected by mid-year.
“Market expectations show the Fed will likely keep interest rates unchanged in the range of 4.25%-4.50%, so traders will rather focus on Fed Chairman Jerome Powell’s comments on the central bank’s policy outlook,” Lagaart said.
“Powell is not expected to comment on President Donald Trump’s criticism of the Fed or why or how Trump calls for lower rates. Instead, Powell is expected to repeat that the central bank remains independent and data-dependent and will focus on its dual mandate: inflation and the jobs market.”
Temporary decoupling of gold price from dollar and bond yields
“The temporary decoupling of the gold price from the US dollar, bond yields, and interest rate expectations is likely due to robust demand for gold as a haven,” Fritsch said.
Bloomberg-tracked gold ETFs saw net inflows of 8.5 tons during the first three and a half weeks of the year.
Uncertainty was at its peak in the middle of the month, shortly before Trump’s inauguration, which led to inflows. The new US president’s decision to not raise tariffs has resulted in outflows since the inauguration.
“However, this did not prevent the gold price from almost reaching record levels,” Fritsch added.
The price of gold increased in the first half of January, even though the US dollar was stronger and bond yields were much higher.
The US dollar and bond yields have both retreated from their earlier gains and are now trading slightly below and slightly above, respectively, their levels at the start of the year.
Conversely, gold has experienced a significant increase of roughly $120 since the beginning of the year.
According to experts, Monday’s slide in gold prices indicated that a correction potential had been built up in the yellow metal.
“While gold is below the ‘overbought’ levels seen at the end of October when it hit its all-time high of $2,790, this flattening could be a precursor to a downside correction, or some consolidation at least,” Morrison said.
Gold price outlook
The positive start in gold prices at the beginning of this year has resulted in brokerages raising their forecast for prices.
Given the current price trend, Commerzbank has revised its gold price forecast for the end of the first quarter upwards, from $2,600 to $2,700 per ounce.
The same applies to the end of the 2nd quarter, according to the German bank.
Additionally, Commerzbank economists predicted that the Fed will implement two more interest rate cuts of 25 basis points each by the end of the second quarter.
“Hence, we do not see a permanently higher gold price, even if short-term price swings in either direction are possible,” Fritsch said.
For the end of 2025, the bank continues to expect a gold price of $2,650 per ounce. Other multinational banks such as Goldman Sachs have previously said that gold prices could touch the crucially important $3,000 per ounce mark before the end of 2025.
“After all, the Fed’s interest rate cuts are likely to be finished by the middle of the year, which is why the gold price should then lack important support,” Fritsch concluded.
Morrison added:
If prices were to pull back from current levels, then the first major line of support comes in around $2,720. A break below there could see prices revisit $2,660 and test another significant support region.
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