Precious metals rebound; short-term investors fuel gold's price swings

Rebounding from a one-week low reached in the previous session, gold prices increased on Wednesday.

This rise comes as markets anticipate the Federal Reserve's January meeting minutes, which may offer clues regarding the outlook for rate cuts.

Gold buyers are making a renewed push to reclaim the $5,000 level this Wednesday, following a recovery from weekly lows near $4,850 reached on Tuesday.

Investors are looking for further clues on the direction of interest rates. 

Gold, silver rise on dovish Fed hopes and key data ahead

The release of the US Personal Consumption Expenditures (PCE) report for December, due on Friday, will be closely watched, following the FOMC minutes scheduled for release later on Wednesday.

Currently, markets anticipate the Federal Reserve will begin cutting interest rates in June, according to CME's FedWatch Tool. 

This outlook is generally favorable for non-yielding assets like gold and silver, which perform well in low-interest-rate environments.

However, Federal Reserve officials have offered differing views on the pace of future cuts.

Chicago Fed President Austan Goolsbee suggested on Tuesday that the Fed could approve "several more" interest rate cuts this year, provided inflation continues to decline toward the central bank's 2% target. 

Conversely, Fed Governor Michael Barr indicated that another central bank interest rate cut might be "well down the road," citing ongoing risks to the US inflation outlook.

“The revival in the dovish sentiment surrounding the US central bank’s monetary policy stance seems to be supporting the recovery in the non-yielding gold,” Dhwani Mehta, analyst at FXStreet, said in a report. 

The gold contract on COMEX was at $4,954.55 per ounce, up 1%.

Meanwhile, silver prices also climbed above $75 per ounce, rebounding somewhat from Tuesday’s losses. 

The silver contract on COMEX was last at $75.612 per ounce, up 2.8% from the previous close. 

Geopolitical tensions provide haven demand

The failure of the second round of US-Iran talks in Geneva to reach a deal has kept markets nervous, leading to a renewal of haven demand for gold.

Regarding international diplomacy on Tuesday, the Iranian Foreign Minister, Abbas Araqchi, stated that while Iran and the US reached an understanding on "guiding principles" for talks concerning Tehran's nuclear program, a final deal is not immediately expected.

Simultaneously, US-mediated peace talks between Ukrainian and Russian negotiators began in Geneva. 

The first of two days of meetings concluded, with US President Donald Trump urging Kyiv to move quickly toward an agreement to conclude the four-year conflict.

“However, the ongoing US Dollar (USD) strength, due to rebalancing, could keep the Gold price upside in check,” Mehta said. 

Attention will then shift to Friday's barrage of three key data releases and the US Supreme Court's ruling on Trump's tariffs, both of which will provide new direction for gold.

Long-term drivers and key risks for gold

The arguments suggesting that gold's appreciation will not continue are present, but ultimately, they are flawed, according to JP Morgan. 

“Gold has had a ferocious rally over the last five years, skyrocketing over 170%, wrote Kriti Gupta, Executive Director of JP Morgan Private Bank, and Justin Biemann, Global Investment Strategist.

“There’s a laundry list of reasons why, but the biggest driver may be a new era of geopolitical volatility and fragmentation incentivizing investors to buy the precious metal,” the experts were quoted as saying in a Kitco report. 

Gupta and Biemann identify two main risk areas for gold. The first is the potential for central banks to stop the heavy buying observed in recent years.

Since the start of Russia's war on Ukraine in 2022, central banks have significantly increased their purchases of gold, with net purchases doubling. 

This surge in demand for the precious metal is driven by efforts to diversify national reserves away from the US dollar, particularly after the US froze Russian assets.

A second significant risk to the sustained increase in the price of gold is the potential for retail investors to lose confidence in the metal.

The short-term nature of new investor interest in gold poses a risk, as they may divest just as quickly if market risks subside or alternative hedges appear. 

The extreme volatility witnessed at the end of January clearly illustrates this point: gold's price surged by 20% within a week, only to plummet by the same margin over two days. 

This incident suggests that short-term investors are significantly influencing price movements.