Gold Price Forecast: Can Central Bank Buying Offset Fed Pressure Below $4,075?
After a dramatic correction from January’s record highs, gold is still facing selling pressure, although the long-term investment
Quick overview
- Gold has experienced a significant correction, dropping over 26% from its January highs, but long-term investment fundamentals remain strong.
- Central banks, particularly in emerging economies, are increasing gold reserves, with 45% of surveyed banks planning to buy more in the next year.
- Higher US Treasury yields and a strong dollar are limiting gold's near-term upside, as investors shift towards income-generating assets.
- Despite current market uncertainty, analysts believe the recent price drop is a technical correction rather than a sign of a prolonged bear market.
After a dramatic correction from January’s record highs, gold is still facing selling pressure, although the long-term investment thesis is improving. On July 13, spot gold is sitting around $4,053 after dropping more than 26% from above $5,500/oz. Earlier this year. This pullback is largely due to a strengthened US dollar, increased US Treasury yields and expectations that the Federal Reserve will keep interest rates higher for longer. However, strong central bank demand, limited mine supply and persistent inflation risks are still supporting the long-term investment case.
Central Bank Demand Continues to Build a Long-Term Floor
Gold’s correction so far hasn’t weakened gold’s structural fundamentals. In the latest World Gold Council survey, 45% of central banks surveyed plan on increasing their gold reserves over the next 12 months, while 89% expect that global official gold reserves will continue rising in the foreseeable future. This steady buying activity reflects emerging economies’ continuing efforts to diversify their reserves away from the greenback amid geopolitical tensions and high levels of sovereign debt.
Among gold’s biggest buyers is China’s central bank, which is sticking to its long-running strategy of increasing gold reserves. At the same time, gold supply remains relatively inelastic as new gold deposits require years of development and regulatory approval before making a significant contribution to global supply.
Meanwhile, despite the decline, institutional investors continue to take a constructive view of gold prices. UBS says that gold can reach $5,200 per ounce over the next 12 months, while Wells Fargo expects gold to be back in the $5,300 to $5,500 region before year-end 2026. Also, MKS PAMP is forecasting an average price of around $4,500 for the year and says that the drop represents a reset after an exceptional rise in the gold market rather than the start of a prolonged bear market.
Higher Treasury Yields Continue to Limit Near-Term Upside
On a near-term basis, the gold price faces headwinds from the higher interest rate environment. At its FOMC meeting held from June 16-17, the Fed kept its tone cautious. Federal Reserve Chair Kevin Warsh remarked that inflation is still above target after core CPI came in at 4.1%. Also, futures markets have repeatedly implied a 58-67% probability that the Fed will hike interest rates again later this year, keeping U.S. Treasuries yields above and the greenback higher.
Higher real interest rates increase the opportunity cost of owning gold, which doesn’t pay a yield, as investors are likely to move out of non-income-generating assets and into income-producing investments, such as bonds, stocks and savings products. Meanwhile, improved sentiment in the Middle East after de-escalated tensions over the Strait of Hormuz may be removing the safe-haven support from gold and prompting investors to take profits after the metal’s record-breaking rise this year. Also, the higher dollar is likely to hurt the metal as the precious metal is most often traded in US dollars.
However, analysts believe that this is a technical correction rather than a breakdown in gold’s longer-term trend. In fact, physical demand has consistently appeared near the $4,000 mark, which prevented a deeper drop in the second quarter.
Gold Price Outlook: Bears Defend $4,090 Resistance
Technically, gold is correcting on the four-hour time frame after falling below its long-term declining trend line from February. Gold is still trading below the 200-period exponential moving average (EMA) at $4,257, while the $4,091 level, the first major resistance, has also rejected the metal.
A breakout above $4,091 could allow a recovery in the near term, with the next resistance level at $4,157 and then $4,222. On the other side, the immediate support level is at $4,024, and that can then be followed by support at $3,962 and $3,903.
The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are still favoring bears. However, RSI at 38.47 has stopped falling from the oversold region, while MACD histogram below the mid-line is flattening out, suggesting that the bears are losing steam.
While near-term market sentiment on gold continues to look uncertain, the metal’s long-term investment case remains supported by record central bank buying demand, constrained mine supply, elevated US government debt and continued inflation risks. The next catalyst for gold will likely come from upcoming US inflation prints and Fed commentary, after which the precious metal can either extend the corrective trend or start building another recovery trend above $4,091.
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