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23.02.202414:19 Forex Analysis & Reviews: Federal Reserve may make a political mistake that will favor gold

Exchange Rates 23.02.2024 analysis

As the expectations for the initiation of the Federal Reserve's policy easing cycle continue to be pushed back, the gold market is experiencing difficulties. However, according to one of the market strategists, Nitesh Shah, head of commodity and macroeconomic research at WisdomTree, the longer the central bank waits, the higher the risk of a political and economic mistake for the Federal Reserve, which could ultimately be positive for the precious metal.

When interest rates decrease later this year, bonds will become more expensive, leading to a renewed interest in gold. By the fourth quarter of this year, gold prices are expected to reach $2,210 per ounce, setting a new record. But there is a stronger bullish argument for gold, as the Federal Reserve risks making a political mistake. The market likely assesses the economic situation slightly better than the Federal Reserve, as they pay too much attention to inflation issues from the supply side.

Gold also looks attractive as inflation may become relatively unstable in the medium and long term. Due to China's weak economy, the country may ultimately become a deflation exporter worldwide. Over the past few years, China has produced tons of solar panels and electric vehicles, and to support its economy, they will have to sell them somewhere. It can be expected that China will flood the global market with cheap goods, leading to deflation. Accordingly, such an environment will provide the Federal Reserve with enough opportunities to lower interest rates.

However, inflation remains a long-term threat as sovereign debt continues to rise and the trend of deglobalization gains momentum. The debts of governments in every major economy are increasing, and it's not an easily solvable problem. Government debts create long-term inflation. Consequently, this only increases the risk that central banks will make a political mistake at some point.

*El análisis de mercado publicado aquí tiene la finalidad de incrementar su conocimiento, más no darle instrucciones para realizar una operación.

Irina Yanina,
Analytical expert of InstaSpot
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