Gold price (XAU/USD) corrected lower, dropping half a percent to $2340 today, Monday, after U.S. consumer confidence data suggested that interest rates may remain higher for longer amid rising inflation expectations, reducing gold’s appeal as a non-yielding asset.
The preliminary University of Michigan Consumer Confidence Index for May fell to 67.4 from 77.2, with economists expecting a milder decline to 76.0.
Meanwhile, long-term inflation expectations rose to 3.1% from the previous 3.0%.
In my opinion, elevated inflation expectations suggest that the Federal Reserve may continue to delay its anticipated move to lower interest rates.
This is negative for gold as higher interest rates increase the opportunity cost of holding gold compared to interest-bearing assets such as bonds or cash.
Several Federal Reserve officials also delivered hawkish messages last week. Atlanta Federal Reserve President Raphael Bostic stated that she does not expect it would be appropriate for the Federal Reserve to lower interest rates in 2024, citing rising inflation in the early months of the year. Neel Kashkari, President of the Minneapolis Federal Reserve, indicated a “wait-and-see” stance on future monetary policy.
Consumer morale in the United States sharply declined in May to its lowest level in six months amid stubbornly high inflation rates. On the other hand, the Israeli military stated that operations in Gaza continued overnight, with “precision operations” ongoing in eastern Rafah and near the Rafah border, as well as in the Zaytoun neighborhood in central Gaza.
Military escalation in Rafah before a wide-scale invasion may elevate geopolitical tensions in the Middle East, potentially boosting prices of precious metals like gold, a traditional haven asset.
From my perspective, this week will be crucial for breaking the current sideways market, and market volatility will be high as gold traders monitor speeches by Jefferson and Mister from the Federal Reserve today, Monday. Later in the week, the focus will shift to the U.S. Consumer Price Index (CPI), Producer Price Index (PPI), and retail sales.
Stronger-than-expected economic data releases may weaken hopes for a Federal Reserve interest rate cut, exert some selling pressure on gold, support the strength of the dollar, and provide some insight into economic expectations and future inflation trajectory. Therefore, this week is deemed highly significant for the markets.
