Gold prices remained stable for most of Wednesday as investors awaited the outcome of the U.S. Federal Reserve’s two-day meeting later in the day. Prices fell in the previous session as market continued to worry about the long-term outlook for US interest rates.
The Fed is expected to slow its rate cut cycle as US inflation remains flat, while the labor market has been resilient. The gold contract on the Comex exchange was at $2,661.94 an ounce, stable from the previous close.
Gold prices under pressure ahead of the Fed meeting
Gold prices on the Comex fell below $2,650 an ounce on Tuesday, erasing most of last week’s accumulated gains.
Carsten Fritsch, commodities analyst at Commerzbank AG, said: “The main headwind is the sharp rise in US bond yields, which increases the alternative cost of holding gold.” High interest rates weaken demand for gold because it is an irreversible asset, unlike bonds.
Commerzbank also believes that the market has already set the rate cut rate at the Fed’s ongoing meeting, which ends later in the day.
Investors will now focus on Fed Chairman Jerome Powell’s comments, looking for clues about the central bank’s preferred path next year. Traders set a 95.2% probability that the central bank will cut interest rates by 25 basis points later in the day.
According to experts, the selling pressure on gold is far from over. While it could be debilitating if prices manage to maintain current levels, a retest of $2600 cannot be ruled out. David Morrison, senior market analyst at Trade Nation, said: “A drop below this level would open the possibility of falling back to mid-November lows, at around $2,530, or even a return to late summer levels at around $2,500.”
Expectations of the impact of interest rate cuts on gold prices
Rising US Treasury yields have kept gold prices muted even as markets expect a rate cut by the Federal Reserve this week. The gold/USD pair remained under pressure below the $2660 level as last week’s bullish break attempt stopped at $2725. The precious metal slipped back below the downtrend line from recent highs, keeping momentum limited.
However, sellers were also kept away as recent declines contained, for the most part, above the $2,630 level. The risk of geopolitical tensions and weak economic data has kept investors interested in gold for diversification purposes, preventing it from becoming a seller’s market. So far, with interest rates expected to fall more slowly than expected, there is no real desire to be a gold seller, which is evident from the continued support every time the momentum turns lower.
How markets perceive the US Federal Reserve’s interest rate adjustment next year will be a key driver for gold. As a non-yielding asset, the opportunity cost of holding gold decreases as prices fall, which is a positive driver for the price. Markets believe the Fed will cut interest rates in December, which could give the gold/USD pair a small daily boost. However, the updated economic forecast may show fewer expected rate cuts for next year as the economy remains resilient, potentially limiting price increases.
Given that prices will likely fall next year, even if only by a smaller amount, the argument remains that this market does not suit gold sellers, as underlying conditions should improve. However, with the strong bullish momentum the gold/USD has gained this year, the rally may have become slightly saturated over the next few months, indicating a potential trend shortfall and a continuation of a sideways trend.
Bitcoin Funds Outperform Gold in Assets Management
Analyst at cryptocurrency market research firm K33 Research, the assets under management (AUM) of US-listed Bitcoin spot ETFs have officially surpassed those of gold ETFs. Lunde shared this feat on December 17 via X, highlighting the unprecedented moment.
Gold ETFs were first introduced in 2003, giving the precious metal a good start. By comparison, Bitcoin spot ETFs were only launched in the US in January 2024 after years of regulatory delays. Despite this gap, Bitcoin ETFs have managed to outperform gold ETFs in terms of assets under management, indicating institutional and retail growing confidence in digital assets.
The approval of Bitcoin spot ETFs marked a turning point in the adoption of cryptocurrencies within traditional financial markets. These products allow investors to gain direct exposure to Bitcoin without holding the asset itself, bridging the gap between digital assets and traditional finance.
This achievement reflects the growing demand from investors for regulated investment instruments available in Bitcoin, especially considering the strong performance of the Bitcoin price throughout 2024.
The rapid growth of bitcoin ETFs reflects growing institutional interest. Financial giants such as BlackRock, Fidelity and have launched bitcoin ETFs, providing credibility and exposure to a wider investor base.
The best scenario for gold is for the Fed to expect inflation to slow faster than expected next year and therefore expectations of rate cuts remain unchanged or even increased. This would prompt markets to reprice their own forecasts, which is likely to give gold a boost to recent highs, and an attempt to break above $2,800.
