Potential Headwinds for Gold Prices

Gold becomes more sparkling in the eyes of investors as a safe haven

Gold prices have been volatile in recent times. Back in March 2022, when the Ukraine conflict began, gold was at $2,069 an ounce before selling off, falling to nearly $1,600 an ounce in September 2022. By March 2023, gold prices had recovered strongly after the collapse of Silicon Valley Bank, surpassing the $2,000 an ounce mark before falling again. Gold is currently facing a number of factors pushing up prices and factors putting downward pressure on prices.

Ongoing geopolitical tensions and concerns that the United States could enter a recession have helped support gold prices above $1,900, while pent-up demand from COVID-19 in several major markets has also helped push prices higher.

Recently, inflation in the US has shown signs of slowing down. This is also a supportive factor for gold prices because it reduces expectations of future interest rates, making the metal more attractive to investors.

The “headwinds”

Despite the aforementioned supportive factors, gold prices still face some headwinds. The strength of the US dollar has eased from its highs in the second half of 2022, but it has maintained its position. A strong US dollar is bad news for gold because it makes the metal more expensive to hold. The price of the metal, which is priced in US dollars, can hurt foreign demand. As a result, when the dollar strengthens, gold prices tend to fall.

The outlook for the dollar is seen as unpredictable and largely depends on whether the US economy enters recession, how quickly inflation falls and what the US Federal Reserve does.

Interest rates are also inversely related to gold prices. With interest rates remaining high – and possibly rising – bonds and fixed income investments are an attractive alternative to gold. If the rate hike cycle ends, gold will continue to benefit.

However, recently, the Chairman of the US Federal Reserve, Jerome Powell, expressed concern that the unstable factors in the world will affect the FED's anti-inflation campaign. He also left open the possibility of raising interest rates in the near future, because the decision of the Federal Open Market Committee depends on the actual situation. If the FED continues to tighten its policy, the gold market will face pressure.

According to the World Gold Council, 2022 was the strongest year for gold consumption in more than a decade. That trend reversed in 2023, with demand for gold falling 13% year-on-year in the first quarter. Continued purchases by central banks around the world were not enough to offset demand.

Looking ahead, the outlook for gold remains fairly balanced. Gold prices have risen 5.4% in the first half of the year. The end of the Fed’s rate-tightening cycle and a weaker US dollar are also favorable. The economic downturn will also push gold higher due to its impact. However, if the US and global economies continue to show resilience, gold prices could be affected.

Analysts predict that gold prices will continue to be affected by many factors. The market needs to prepare for unexpected situations.

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