HG MARKETS:

Gold prices experienced a slight dip on Tuesday, following a record high achieved the previous day. The market’s attention has shifted to the Federal Reserve’s interest rate decision, with a focus on the two-day policy meeting that is set to conclude on Wednesday. Traders are speculating about a potentially aggressive rate cut, which has influenced gold’s recent price movements.

Gold is trading at $2,607, marking a decrease of $10.94 or -0.42%. The current market sentiment indicates a growing anticipation for a significant rate cut by the Fed, with a 67% probability assigned to a 50-basis point reduction. This contrasts sharply with the 34% probability assigned to such a cut just a week ago. This shift in expectations was driven by media reports over the weekend suggesting a more substantial easing by the Fed. If the Fed follows through with a 50-bp cut, gold prices are projected to surge past $2,620 per ounce, with estimates ranging between $2,649.43 and $2,660.90.

On the other hand, if the Fed implements a more modest 25-bp cut, it could lead to disappointment among bullish traders, potentially triggering profit-taking and causing gold prices to retreat towards the former high of $2,570. Lower interest rates typically benefit gold by diminishing the opportunity cost of holding the non-yielding asset.

Gold’s recent rally has been fueled by expectations of a Fed rate cut and a weakening dollar. The precious metal reached a new all-time high of $2,617 per ounce on Monday. Goldman Sachs remains optimistic about gold’s future, maintaining a price target of $2,700 per ounce by early 2025. The investment bank attributes its bullish outlook to continued central bank demand and the Fed’s dovish stance, which supports higher gold prices.

Goldman Sachs also noted an increase in ETF demand for gold, driven by Western capital flows into gold-backed exchange-traded funds. These ETFs, which are fully backed by physical gold, reduce the available physical supply on the market, thereby supporting higher prices.

In addition to the Fed’s decision, traders are also keeping an eye on broader economic indicators due this week. U.S. retail sales for August are anticipated to show a 0.2% decline, while other economic data on housing starts, building permits, and existing home sales could offer further insights into the U.S. economy’s health. The Bank of England and the Bank of Japan are also holding policy meetings this week, potentially adding to market volatility.

Looking ahead, if the Fed announces a 50-bp rate cut and signals additional easing, the bullish outlook for gold is expected to continue, with potential gains extending above $2,600 per ounce. Conversely, a smaller 25-bp cut might lead to a temporary dip in gold prices due to profit-taking, although long-term support remains robust due to ongoing central bank demand and ETF inflows. Traders should be prepared for potential volatility surrounding the Fed’s announcement and the release of upcoming U.S. economic data.