Gold Prices Firmed Amid Geopolitical Uncertainty and Anticipation of Rate Cut

Gold prices stabilized on Monday, driven by investor optimism of a potential rate cut by the Federal Reserve and geopolitical tensions in the Middle East, offsetting a slight rise in the US Dollar following mixed PMI data.

Gold prices have seen a slight dip in recent days but bounced back, remaining firmly above $2,600. This stability is largely thanks to the anticipated decision of the US Federal Reserve to cut interest rates by a quarter of a percentage point at its meeting on Dec. 17-18. Non-yielding bullion historically performs well in lower interest rates environments, making it a safe-haven asset for investors. Additionally, geopolitical tensions in the Middle East have the potential to weigh on economic stability, further supporting the metal's value. The geopolitical situation in the region is currently volatile, with Israeli strikes in Gaza having claimed at least 53 lives. However, weaker demand in key markets such as India, where domestic prices rebounded and failed to boost demand for gold, posed some headwinds. Similarly, China's stimulus measures did not manage to revive consumer confidence, potentially dampening gold prices. The rebound in spot and US gold futures prices is therefore largely attributed to investors' willingness to buy gold at dips as the market scrambles to respond to central banks and geopolitical risks. Investors are eagerly awaiting the Fed's economic projections, S&P Global Flash PMIs, and Retail Sales data on December 17. With estimates suggesting a likely 25 bps rate cut and a 100 bps total reduction in interest rates in 2025, investors are increasingly banking on lower interest rates to prop up gold demand. While a rate cut may boost the US Dollar initially, downward pressure on interest rates going forward could somewhat unfavourably impact its value, negatively influencing gold demand, but may as a whole positively affect gold prices as it typically increases gold's appeal as a safe-haven asset. Forecasts also highlight a higher possibility for the ECB to unleash additional stimulus in the near future, with ECB Chief Lagarde hinting at a further easing in monetary policy. Traders should keep an eye on inflationary pressures stemming from the Trump administration's policies in the US, as high inflation usually boosts interest rates.