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HomeLatestGold Faces Volatility Ahead as Rate-Cut Expectations Diminish
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Gold Faces Volatility Ahead as Rate-Cut Expectations Diminish

Despite its recent record highs, gold’s impressive rally could be facing headwinds as expectations for rate cuts take a hit, potentially signaling a challenging road ahead for the precious metal.

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Strategists at MRB Partners cautioned against adding gold exposure at current prices, citing vulnerability on a 6-12 month horizon. They emphasized that forward markets are likely to unwind Federal Reserve rate cut expectations further, while bond yields may experience additional upside.

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Gold prices have surged amidst a macroeconomic environment characterized by geopolitical tensions, a weakening dollar, and sluggish real yields since October last year, accelerating notably in mid-February. However, recent trends in the dollar and bond yields, particularly real yields, suggest a more challenging trajectory for gold’s ascent.

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The uptick in yields followed a series of hawkish comments from Federal Reserve officials, including Chairman Jerome Powell, who indicated a diminished confidence in initiating rate cuts due to recent inflationary surprises. Consequently, market expectations have shifted, with the first rate cut now projected for September instead of June. Furthermore, fewer rate cuts are priced in for both 2023 and 2024 compared to previous estimates.

Despite the backdrop of rising yields and a strengthening dollar, gold has continued to appreciate, albeit being deemed “overbought” by MRB Partners. The metal’s resilience could be attributed to ongoing momentum and increased demand for safe-haven assets amid heightened geopolitical tensions.

However, significant challenges for gold may emerge as central banks withdraw excess liquidity from the markets. MRB Partners highlighted that gold’s support may persist as long as central banks maintain accommodative monetary policies, but major vulnerabilities could arise once liquidity conditions tighten.

In summary, while gold has enjoyed a period of strength driven by various factors, including momentum and safe-haven demand, uncertainties lie ahead as rate-cut expectations diminish and central banks adjust their monetary policies. Investors should monitor these developments closely as gold navigates potential volatility in the coming months.

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