The Price of Gold Continues to Build a Base Near New Records

In January, the price of gold dipped by 1 percent yet remained near the record highs achieved in December. Anticipations of declining interest rates, coupled with ongoing gold purchases by central banks, are the primary drivers supporting gold’s current valuation.

The gold market opened the year with stable, lateral movements, experiencing a modest decline of 1.1 percent in January, settling at $2,039 an ounce. By the onset of February, the price edged slightly lower to $2,033 per ounce.

Last year, gold witnessed a 13 percent increase in value, culminating in a new record high in early December. The close of the previous year laid the groundwork for a continued upward trajectory in gold prices. You can read last year’s summary and new year’s forecasts here.

Meanwhile, silver experienced a 3.6 percent decrease in January, dropping to $22.93 an ounce and is currently valued at $22.3 an ounce.

Interest rate policy is poised to favourably impact gold prices this year

The short-term outlook for the gold market is primarily shaped by central bank statements and expectations surrounding interest rates.

Whereas it was previously anticipated that the Federal Reserve might commence interest rate cuts as early as March this year, expectations have now shifted towards May for the initial reduction. This adjustment in forecast led to a dampening of the late-year optimism within the gold market, resulting in a period of consolidation throughout January.

Reduced interest rates benefit gold because they typically lead to lower yields on US Treasuries, thereby decreasing the opportunity cost associated with holding gold. For more insight into how interest rates influence gold prices, further reading is available.

Market participants anticipate the Federal Reserve and the European Central Bank will implement rate cuts totaling approximately 1.5 percentage points this year. Expectations are set for the US base interest rate to adjust to 4.75 percent by June, down from the current rate of 5.5 percent. Furthermore, there is a 90 percent likelihood, according to market forecasts, that interest rates will reach or fall below 4.25 percent by the year’s end.

Should these expectations come to fruition, they would bolster gold prices throughout the year. Anticipated interest rate reductions suggest that the $2,000 threshold for gold will remain intact, preventing any significant dips below this level. In fact, gold is now establishing a solid foundation above the $2,000 mark, laying the groundwork for potential future price increases when analyzed from a technical perspective.

Tensions in the Middle East Create Uncertainty

Geopolitical tensions continue to sow uncertainty. The conflict in Ukraine shows no signs of abating, and the Red Sea has seen significant disruptions to global trade due to attacks by the Yemeni Houthi group. The Suez Canal in Egypt, a critical trade artery connecting Asia and Europe, has experienced a drop in volumes by more than 40 percent in recent months.

These developments bolster gold’s appeal, amid concerns that turmoil in the Middle East could intensify, potentially impacting the oil market and, consequently, inflation in Western countries. Read more about how geopolitical events affect the price of gold here.

While the influence of geopolitical events on gold prices is typically short-lived—an aspect further explored here – prolonged conflicts, such as the war in Ukraine, continue to underpin gold’s value. This is due to the extended uncertainty and economic repercussions they bring, including significant effects on inflation rates.

Gold Purchases by Central Banks Remain at a High Level

At the end of January, the World Gold Council released data on last year’s gold purchases by central banks, revealing figures slightly below the record-setting year of 2022, yet still historically significant.

In the final quarter, central banks acquired a total of 229 tons of gold – a 35 percent decrease from the third quarter, but the annual total reached an impressive 1,037 tons. The central banks of Poland and China were among the top contributors to this increase in reserves.

Since 2010, central banks have officially purchased a staggering 7,800 tonnes of gold, with over a quarter of this amount acquired in just the past two years.

The Technical Picture Continues to be Supportive

Gold remains steadfast above the critical $2,000 threshold, establishing a new foundation at this level according to the technical analysis. What was once a formidable resistance, challenging to surpass and sustain over time, is gradually transforming into a solid support level. This newfound support has the potential to serve as a launchpad for reaching new heights.

In the near term, gold faces a significant resistance point at $2,075, a level that aligns with its previous peaks.

Should gold dip considerably below $2,000, it would find subsequent support at $1,975 and then at $1,930. Beneath these levels, a robust support exists at $1,800.

I anticipate that the anticipated reduction in interest rates, coupled with ongoing gold purchases by central banks, will continue to bolster gold prices through the spring. After almost four years of lateral trading, my projection is that we are on the cusp of setting new record highs this year, initially targeting the range between $2,150 and $2,300.