After hitting a historical high last week and then plunging, international gold prices have begun to fluctuate narrowly around $2400. The continuous cooling of expectations for a Federal Reserve rate cut has suppressed buying activity, and the temporary stability in the Middle East has also limited the entry of safe-haven funds. It appears that pressure for short-term adjustments is brewing.

Fed Policy Turmoil Resurfaces

Since gold is priced in US dollars, the strength of the US dollar index often influences the trajectory of gold prices, which is closely related to the Federal Reserve's monetary policy. Since the Fed began a new round of tightening in March 2022, international gold prices fell nearly 15% within half a year. It was only after inflation peaked and the Fed slowed the pace of rate hikes that gold began to gradually recover its previous losses.

However, the previously clear prospect of easing is once again being tested with economic data and price pressures. Federal Reserve Chairman Powell stated on Tuesday (16th) that due to a "lack of further progress" in inflation so far this year, interest rates may remain higher for longer than expected. He emphasized that the economy remains robust, and the Federal Open Market Committee can maintain the current level of monetary policy restrictions "as needed" until there is more evidence that inflation is slowing down.

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Coincidentally, Federal Reserve Vice Chairman Jefferson also warned this week that if inflation proves to be more persistent than expected, interest rates may have to remain high for a longer period. This "second in command" at the Fed believes that despite high interest rates, the sharp rise in consumer prices and accelerated employment demonstrate that the US economy is still very hot, with "recent employment growth and inflation data both higher than expected."

Oanda Senior Market Analyst Craig Erlam, in an interview with First Financial Daily, stated that there are signs that within the Fed there is some concern about the duration of recent high inflation. To confirm the achievement of the ultimate goal, the timing of the first rate cut may be postponed to the second half of the year, with September being a potential option.

Federal funds rate futures indicate that traders expect only about 40 basis points of easing from the Fed this year, which means the Fed may not be able to achieve its previously set goal of three rate cuts.

Wall Street has even provided a more dire scenario forecast. JPMorgan Chase CEO Dimon expects that US real interest rates could soar to 8% or more in the coming years. UBS Group Chief US Economist Pingle stated in a report that if the inflation rate remains above 2.5%, the Fed may raise interest rates again and predicted that by mid-next year, the federal funds rate could reach 6.5%. UBS said this would be a scenario of the economy "landing," and further rate hikes could significantly flatten the US Treasury curve.

The International Monetary Fund (IMF) stated in its latest financial market risk report that the Fed should not cut interest rates out of concern for financial stability. "Central banks should avoid easing monetary policy too early. On the contrary, they should resist market expectations for policy rate cuts that are too optimistic, as this could exacerbate financial conditions and complicate the last mile of disinflation."

Multiple Factors Benefit Gold Prices in the Medium to Long TermFactors driving this year's gold prices to new highs include not only expectations of interest rate cuts but also geopolitical risks and the entry of central banks and investors. Since ancient times, gold has been an important way to preserve the value of assets during turbulent times. The unresolved conflicts between Russia and Ukraine, as well as between Palestine and Israel, are still hanging in the balance, and now there is also a risk of escalation between Iran and Israel.

Last weekend, Iran launched over 300 drones and missiles towards Israel, and the outside world is now waiting for Israel's response. Eram stated to First Financial that, from the perspective of short-term gold price fluctuations, geopolitical factors can quickly drive safe-haven buying, and the market is watching the risks of the deterioration of the situation in the Middle East and the potential spillover, to see if more forces will be involved.

Eram believes that although Israel has expressed its willingness to retaliate, there have been no further actions that would escalate the situation. If the tensions can be quickly stabilized, gold prices may experience a narrow range of fluctuations or a slight decline in the short term to digest the previous geopolitical and monetary policy premiums.

Many institutions still have a positive outlook on the future trend of gold prices. Citigroup analyst Aakash Doshi released a report, expecting gold to test $2,500 in the second half of this year and raising the target price for 2025 to $2,875.

Citigroup believes that the prospects of the Federal Reserve's interest rate cuts, as well as the potential recession scenario in developed countries by 2025, may also be further driving factors. In addition, supported by factors such as gold bar and coin consumption and central bank purchases, gold has decoupled from U.S. interest rates and the dollar, indicating strong physical consumption-driven momentum.

According to data from the World Gold Council, since 2010, central banks have cumulatively purchased more than 7,800 tons of gold, with more than a quarter of that amount being bought in the past two years. Metals Daily CEO Ross Norman stated that future official purchases will remain stable, possibly maintaining at over 1,000 tons per year. "De-dollarization is a continuous theme, and many countries are consciously transferring foreign exchange reserves to gold to balance risks," he added.

Goldman Sachs has raised its year-end price forecast to $2,700 per ounce. The report states that since the middle of 2022, most of the reasons for the rise in gold have been driven by new incremental (physical) factors, which have been fully confirmed in the current macro policy and geopolitical environment. Additionally, risks from the U.S. election cycle and fiscal risks continue to make the bullish bias for gold evident.