Gold price forecast: the bullish case for XAU is still strong

Gold price has retreated recently as the focus shifts to the upcoming Federal Reserve decision and US consumer price index (CPI) data. After peaking at a record high of $2,450 in May, it has now dropped by over 5.57% to $2,315.

Bullish catalysts for gold

The price of gold has done well in the past few months. It has jumped from a low of $1,615 in 2022 to the current $2,315. 

It has retreated recently as demand from Chinese retail investors faded and as traders focused on the next actions by the Federal Reserve.

The Fed is expected to leave interest rates unchanged between 5.25% and 5.50%. I expect Jerome Powell to maintain the view that the bank will be data-dependent when determining when it will cut interest rates.

The decision will come a few hours after the US publishes the latest US inflation data. Economists believe that the headline Consumer Price Index (CPI) rose to 3.5% while the core CPI retreated slightly to 3.6%.

These events have a big impact on the price of gold. In most cases, gold rises when inflation is stubbornly high because it is often seen as a hedge against inflation. However, gold also thrives when the Fed is a bit dovish.

US public debt soaring

Broadly, gold has become a popular asset amid the rising US public debt. The most recent data shows that the US public debt has jumped to more than $34.6 trillion and the figure is expected to soar to $35 trillion in the next few years.

Most experts believe that the soaring debt is the biggest risk that the US faces. In a recent interview, Professor Jeffrey Sachs said that the debt trajectory could see it reach 200% of the GDP in the next few decades.

Sadly, there is no easy way out for the debt as the Republicans and Democrats have become addicted to spending. Also, Donald Trump has vowed to unveil more tax cuts that could lead to more deficits.  

His previous tax cuts have helped to grow the country’s deficit. If they don’t expire, they will cost the US $6 trillion in the next decade. As such, more unfunded tax cuts could lead to a UK mini-budget-like meltdown.

At the same time, Washington’s addiction of sanctions has pushed more central banks to de-risk from the dollar. Gold has become a better alternative for top central banks in countries like China, Russia, and Turkey.

All this is happening at a time when gold production in countries like Australia and South Africa is falling. New mines are no longer being found while it is becoming difficult to mine in existing mines.

Gold price outlook

Gold chart by TradingView

Therefore, a combination of slow gold production trend and more demand will likely lead to higher prices in the long term. If this happens, the price could soon blast to $2,500 this year and $3,000 in the next few years. 

In the short term, however, gold has formed a small head and shoulders pattern, which is a popular bearish sign. This means that the price could drop to $2,250 after the Federal Reserve decision and US inflation data.