Thursday witnessed a slight decline in gold prices attributed to the strength of the dollar and increased optimism surrounding U.S. debt-ceiling negotiations. This diminished the appeal of gold as a safe haven asset.
At 0653 GMT, the spot gold price experienced a 0.2% dip, reaching $1,977.79 per ounce, while U.S. gold futures saw a marginal 0.1% decrease, settling at $1,982.10.
The dollar index remained close to a seven-week high from the previous session, making gold relatively more expensive for foreign investors.
According to Edward Meir, a metals analyst at Marex, gold is expected to trade within the range of $1,965 to $2,020 over the next two weeks. However, the overall trend appears weak due to growing optimism about the debt-ceiling talks, which is likely to exert pressure on the precious metal.
Meir also noted that better-than-expected U.S. macroeconomic data has raised the belief that the Federal Reserve may not pause in June, leading to expectations of higher interest rates. This expectation acts as a bearish factor for gold.
On Wednesday, U.S. President Joe Biden and top congressional Republican Kevin McCarthy expressed their determination to promptly reach an agreement to raise the federal government's $31.4 trillion debt ceiling, thus avoiding a potentially disastrous default.
In the broader market, Asia-Pacific stocks rallied, following Wall Street's lead.
OCBC FX strategist Christopher Wong mentioned that progress in the debt-ceiling negotiations reduced market uncertainty to some extent, resulting in a modest improvement in sentiment and consequently impacting gold prices.
Moreover, the current market indicators suggest a 69.3% probability that the U.S. central bank will maintain interest rates at their current levels in June, according to the CME FedWatch tool. Additionally, traders have scaled back their expectations of a rate cut happening this year.
Regarding other precious metals, spot silver saw a 0.5% decline to $23.61 per ounce, platinum decreased by 0.2% to $1,066.71, and palladium dropped by 0.4% to $1,480.85.
Wong added that the observed decline in silver during the month could potentially indicate a tentative stabilization.
In the unlikely event of a United States default on its debt, the consequences would be severe and immediate across markets, causing significant volatility. During such crises, investors tend to engage in widespread selling, including liquid assets like gold, to meet financial obligations and margin calls.
While gold may initially face challenges and perform poorly immediately after a default, its performance can improve as the crisis progresses. This pattern was observed during the 2008 financial crisis, where gold initially entered negative territory while the U.S. dollar strengthened. However, as the crisis unfolded and rate cuts were implemented, gold eventually experienced a positive shift and reached record highs.
The introduction of rate cuts during a crisis acts as a wildcard in the overall dynamics since policymakers worldwide would likely respond with swift financial stimulus measures if the U.S. were to default. These actions could impact the performance of various asset classes, including gold, and potentially contribute to its recovery and subsequent growth.
It's important to remember that the behaviour of markets and assets during a crisis is highly complex and influenced by a wide range of factors. The scenario of a U.S. default remains highly unlikely, and the specific outcomes and reactions of investors can vary depending on numerous variables and policy responses.