Earlier this year, gold prices rose relatively quickly, scoring new record highs one after another. By the end of April, it had accumulated gains of over 30%, a feat that hadn’t happened in years. But, since then, gold has failed to make further headway and seems to be trapped below some heavy resistance at around the $3,500 per ounce level.
From a technical perspective, gold is in an ascending triangle pattern. Each time it has pulled back (in May, June and now in July), it has headed for that resistance level and failed to break through. It seems to be making another run for a new all-time record high. This time, however, it might have some fundamental support to keep that momentum going forward.
Time for the Fed to Act
Gold prices were rising earlier this year in the aftermath of the Fed cutting rates three times in a row. One of those cuts was a “jumbo” 50 bps. Usually, gold prices rise when interest rates fall. That’s because gold usually competes with Treasuries as a safe haven. Higher interest rates attract more people to buy Treasuries to get a better return on their investment. Lower rates mean people are more willing to buy gold as a store of value.
US President Donald Trump has been pushing for lower interest rates for a long time. But, the Fed has argued that high inflation from his tariffs means they can’t do that. Now it looks like Trump might finally get his wish, though perhaps the cut won’t be as much as he’s looking for. Markets are now pricing in a more than 90% chance that the Fed will cut rates at the upcoming September meeting after last week’s jobs report showed significant weakness in the labour market.
A Shakeup at the Fed
But there are also internal factors pushing the Fed. A couple of weeks ago, FOMC member Governor Adriana Kugler announced she would step down early after being offered a professorship at Georgetown University. She’s a noted hawk in the current circumstances. Her early retirement (her term was up later this year) gave Trump the option to appoint a replacement. Presumably, that replacement will be in line with the President’s dovish views and will add to the dissenters who, at the last meeting, voted to cut rates.
On Thursday, Trump announced he would appoint the chair of his Council of Economic Advisors, Stephen Miran, as a temporary replacement to serve out Kugler’s remaining term. Then a permanent appointment would be made. This comes along with the expectation that Trump will soon announce his pick to replace Jerome Powell as Fed Chair in May. The proximity of these announcements could mean that the market moves to price in more dovishness from the Fed.
How Many More Cuts?
The last time that the Fed published its dot-plot matrix, it showed that FOMC members expected two rate cuts in the second half of this year. But markets aren’t convinced anymore. Futures suggest that there is a 50-50 chance of a second rate cut by December.
If those chances of a second cut start to solidify in the coming days, then gold will have a strong ally to keep moving higher. Especially if weakness in the dollar continues, as investors remain worried about the US economy amid new escalations on the trade front.