Spot gold has been trading in a tight range near $4000 per ounce for five consecutive weeks. The market is now closely watching next week's Federal Reserve meeting to gauge the direction of rate hike expectations.
Spot gold has been locked in a narrow tug-of-war around $4,000 per ounce for the past five weeks. Last week, the price briefly dipped below $4,000 to $3,982.32 per ounce before rebounding to $4,166 per ounce. However, it was pushed back down by strong employment data, ultimately closing at $4,052 per ounce, a weekly gain of 0.85%.
Over these five weeks, gold has failed to sustainably hold above $4,100 but has also never completely lost the $4,000 level. In this tight range-bound scenario, all market attention is focused on the upcoming Federal Reserve FOMC meeting on July 28-29. The direction of interest rate hike expectations will be the key variable determining gold's next move.
Why the Stalemate?
The primary headwind preventing gold from holding above $4,100 is the rapid escalation of rate hike expectations. Data from the US Labor Department showed that for the week ending July 18th, initial jobless claims fell by 22,000 to 187,000, the lowest level since September 1969 and well below market expectations. This strong labor market performance pushed the probability of a rate hike at the next FOMC meeting priced into fed funds futures to nearly 38%, up from less than 12% a week ago.
A surge in oil prices has further fueled rate hike bets. Since mid-July, renewed US-Iran tensions have disrupted shipping through the Strait of Hormuz, pushing Brent crude back above $100 per barrel and WTI crude up 8% at one point. Analysts suggest that Brent crude now includes a geopolitical premium of about $20 per barrel. If the strait is blocked long-term, inflation stickiness could increase. The inflation concerns driven by high oil prices continue to strengthen rate hike bets, boosting the US dollar and Treasury yields.
UBS Wealth Management notes that gold's recent consolidation near $4,100 is pressured by ongoing US-Iran tensions and the prospect that rising oil prices could push interest rates higher. While the US June CPI data offered some relief, suggesting the Fed may not need to hike immediately, the market is still digesting hawkish signals from Fed Chair Waller and bond market expectations for higher rates. The firm further analyzes that if the US economy surprises to the upside, employment data tightens, and oil prices rise further, gold could face downside pressure, potentially testing $3,850 per ounce, with downside risks increasing.
Super Central Bank Week: The FOMC Decision is Key
Looking ahead to next week, the market faces a "Super Central Bank Week" with policy decisions from the Fed, the Bank of England, and the Bank of Japan, with the FOMC meeting being the core focus. A senior market analyst from FXTM points out that geopolitics, the Fed's decision, and PCE inflation data could all influence gold's performance at the end of July. If inflation runs hot, expectations for a September rate hike will intensify, making $4,000 a clear downside target. If price pressures show signs of cooling, gold could get a reprieve.
Regarding the European Central Bank, it held its benchmark rate at 2.25% on July 24th. Last month, the ECB raised rates by 25 basis points to 2.25%, stating that the policy rate would remain at this level "for now." However, the collapse of the US-Iran ceasefire has caused "severe changes" in commodity markets, and the full impact of the energy shock on inflation has not yet materialized. A senior economist at Pictet Wealth Management analyzes that unless oil prices fall significantly in the coming weeks, the probability of a September ECB rate hike remains high. However, she notes that current market rate hike expectations are too aggressive, with markets pricing in nearly 70 basis points of additional tightening by next June, while the second-round inflation effects have yet to materialize and the US labor market is gradually cooling.
Investment Demand Lags, but Long-Term Narrative Remains
The core issue for the gold market is a lack of investment demand. UBS estimates that around 500 tonnes of quarterly investment demand is needed to drive gold prices higher. Accelerating investment demand depends on a shift in the US growth narrative toward loose monetary policy or a stagflation scenario. As consumer spending slows, real wage growth weakens, and AI investment growth moderates year-on-year next year, US policy rates will eventually fall. The next rate cut is expected to begin in March 2027. Rate repricing should coincide with a weaker dollar and de-dollarization trends.
On the technical front, traders note that since the second half of the year, gold's two lows ($3,943 and $3,959) have been gradually rising, while its two highs ($4,202 and $4,165) have been gradually declining, forming a symmetrical triangle pattern. This suggests no clear directional trend for gold prices. Many analysts believe $4,000 remains a structural floor. A decisive break below could open the door to $3,950 and $3,900, while holding this level could allow gold to rebound towards $4,100 and $4,200.
UBS analysis suggests that in the short term, the market is deadlocked, and without a pickup in investment activity, risks are tilted to the downside. However, in the long term, the probability of gold falling below $3,850 is low. Short-term weakness is not a reason to abandon gold, as the long-term narrative remains clear. Even if AI spending delays an economic slowdown, long-term debt concerns, a strong dollar, and excessive global USD exposure leave room for gold to strengthen. UBS maintains its gold price targets for September 2026, December 2026, March 2027, and June 2027 at $4,400, $4,600, $5,000, and $5,200 per ounce, respectively, viewing gold favorably from a diversification perspective, especially for investors with a preference for real assets and a multi-generational view.
A research report from a domestic macro team on July 24th suggests that the silver and gold rebound since July 20th is a result of "tech momentum collapsing and funds rotating outward, rather than the confirmation of a new trend." Gold has not yet clearly broken out of the downward channel it has been in since late April. Central bank gold purchases, ETF inflows, and improvements in speculative positioning have all been limited. Gold is more likely to experience a "range-bound recovery" than a unilateral rally in the second half of the year, with a year-end target range of $4,300 to $4,500 per ounce.
Editor: Song Yafang
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