Gold Targets if the Fed Pauses Rate Hikes

Gold has managed to surge its way to US$2,020/oz, taking full advantage of the renewed weakness in the dollar price and treasury yields.

Recent data from the US showed a slowdown in the services sector growth, fewer private company job additions than expected in March, and a fall in factory orders for the second consecutive month. This suggests that the economy could be cooling down amid higher interest rates. As a result, the market anticipates that the Fed will keep the funds rate steady next month, following a similar path to the Reserve Bank of Australia which decided to pause its rate hikes this month. Investors have recently increased their bets that the Fed will opt for a pause in its rate hikes after its May 2-3 meeting to approximately 60%, up from around 43% the previous day.

Gold is particularly sensitive to the rates outlook because lower interest rates reduce the opportunity cost of holding non-yielding gold.

If the Fed does decide to pause rate hikes in May, how might we expect the price of gold to react? Markets see a ~60% probability that the Fed will pause. Target prices could include US$2,027, US$2,032, US$2,036, and US$2,040, with the first two being levels of recent struggle. If we want to look back to the last time that gold was this expensive (March 2022), we might like to consider a couple daily peaks at US$2,070 and US$2,060 as higher targets.

The Fed decision is still quite some time away, so some downside risk is of course still present in the meantime.