The latest minutes from the Federal Reserve's June meeting, released on Thursday, indicate a near-unanimous sentiment among members in favor of continuing interest rate hikes in upcoming meetings, albeit at a more moderate paceFollowing the hawkish sentiment from the minutes, the probability of a rate hike in July has surged to nearly 90%, pushing U.STreasury yields and the U.Sdollar index higher, which in turn contributed to a drop in international gold prices to around $1915 as of July 7.

Gold was one of the most scrutinized asset classes this year, having soared dramatically from approximately $1600 per ounce to over $2000 over the past yearIn fact, it reached a historic high of $2085 in early May

However, with the recent rebound in the U.Sdollar index and an uptick in Fed interest rate hike expectations, the gold prices have retraced by more than $150, settling around the $1900 markOver the long term, gold appears to be in a bullish trend, though it may encounter a phase of consolidation and restraint in the medium term.

Gold Temporarily in a Range-Bound Phase

In the first half of this year, gold prices have risen 5%, making it one of the few commodities that have recorded gains, especially when it hit new historic highs in early MayHowever, since then, a triple top formation on the weekly charts suggests that the bulls may be losing the ability to push gold prices higher in the short term.

From a long-term perspective, gold remains in a bullish trend, yet it may experience a period of volatility in the mid-term

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Central banks, especially the Fed, are nearing the end of their interest rate hiking cycle, but the cessation of hikes does not guarantee a shift to rate cutsInstead, a prolonged period of high interest rates could prevail, which is favorable for gold bulls.

Meanwhile, the much-hyped “economic recession” that has been circulating for the past year and a half seems to lack tangible falloutThe banking crisis that erupted in March seems effectively managed and geopolitical tensions appear to be easing, leading to a significant decline in risk aversion.

The bottom line is that, with high inflation persisting, the Fed remains cautious and is expected to implement one or two more rate hikes within this year

Such rate increases will likely influence the relative value of non-yielding assets like gold.

The Bank for International Settlements (BIS) recently released a report indicating that, despite inflation beginning to decline from decades-high levels, central banks’ work is far from overThe report noted that while recent monetary tightening has been the most aggressive seen in recent memory, the last leg of the journey toward price stability will be the most challengingSignificant progress made thus far in combating inflation largely stems from improved supply chains and declining commodity pricesHowever, tight labor markets and inflationary pressures in the services sector persist“The risk is that inflation psychology could dominate, leading to a reinforcement of wage and price growth

Interest rates may need to be maintained at elevated levels for longer than the public and investors expect,” the report warns.

The Next Boom for Gold Could Emerge When Rate Cut Expectations Materialize

When considering when the next surge in gold prices will occur, some analysts suggest this might happen when market expectations shift towards rate cuts (the first Fed rate cut is projected for the first quarter of 2024).

Historical trends from 2007 and 2019 illustrate that during the transition phase between the end of rate hikes and the beginning of rate cuts, gold prices began to stir in anticipation of the next bull market

During the last two rate-cutting cycles, gold prices reached record highsIf history repeats, it’s reasonable to expect new peaks for gold prices in the near future.

In addition, any unforeseen “black swan” events could instantaneously spark demand for gold, while the unwavering enthusiasm of central banks for gold could continue to support its price.

In the short term, the range of $1892-$1900 can be seen as a temporary support level, but for gold prices to reach new heights, they may need to first dip deeper to accumulate more capital and energySignificant resistance levels to watch on the upside are at $1940 and $1980.

In the Pause of the Interest Rate Hiking Cycle

Gold’s Average Monthly Return Stands at 0.7%

As the global economic processes approach their conclusion, the threat of recession remains, but the diversified demand for gold among central banks worldwide continues to grow, maintaining long-term investment opportunities in gold.

In June, both the European Central Bank (ECB) and the Bank of England (BOE) raised interest rates

In the U.S., however, the Federal Reserve maintained its target rate unchanged due to lagging monetary policyThe most likely timeframe for the next rate hike is July, after which rates are expected to hold steady for a periodHistorically, previous pause periods for rate hikes have lasted between six to twelve monthsDespite the bond markets expecting further rate increases from the ECB and BOE, investors anticipate that the end of the rate-hiking cycle is nearing, likely concluding by year-endThe monetary policy might shift from “tightening” to “pausing rate hikes,” leading market expectations of a mild recession in the U.Seconomy this year while growth in developed economies slows.

The World Gold Council also noted that if these expectations hold true, gold will continue to gain momentum in the second half of 2023, especially considering its robust performance in the first half of the year

However, a dramatic breakout beyond the established volatility range since the beginning of the year is unlikelyThis is driven by four key factors influencing gold performance—economic expansion risks and uncertainties, opportunity costs, and market momentum.

Potential sluggish growth in Western economies could adversely impact gold consumption demand, but the World Gold Council anticipates a better performance from the Indian economyMeanwhile, China’s economy is expected to respond positively to potential stimulus measures later this year, bolstering demandFurthermore, although inflation shows signs of cooling, stock market volatility and “event risks” (such as geopolitical tensions or financial crises) may lead investors to maintain hedging strategies, including investments in gold.

Market consensus predicts a slight decline in interest rates and a potential weakening of the U.S

dollar, both of which would help lower investors' opportunity costs and drive gold prices higherThis aligns with previous pause periods lasting six to twelve months, during which gold has produced an average monthly return of 0.7% (equating to an annual return of 8.4%), above long-term averages.

Notably, global central bank gold purchases hit a record high of 1136 tons in 2022, with this trend continuing into 2023. Central banks in Singapore, Turkey, and India are among those actively buying goldA survey conducted among over 50 central banks last year indicated that reasons such as “performance in times of crisis,” “hedge against inflation,” and “long-term value preservation” drive central banks to hold goldWithin this survey, 61% of responding central banks forecasted an increase in gold reserves over the next twelve months.

(The stocks mentioned in the article are for analysis purposes and do not constitute investment advice.)