Gold prices surged sharply on August 5th, reaching a high of $4,267 per ounce, marking the highest level since June 19th and showing signs of breaking out of its daily consolidation range. The uptrend has continued into today, with the Asia session pushing prices to a peak of $4,303 per ounce, potentially targeting the highest point since June 8th at $4,382 per ounce. Overnight, the US Dollar Index traded in a narrow range between 99.6 and 99.8, suggesting it may not be the primary driver behind gold's recent rally.

Gold and the US dollar typically exhibit an inverse correlation, but as recent data shows, there is often a time lag in their directional moves. The US Dollar Index began its downtrend between July 29th and 31st, but gold did not move in the opposite direction during that period. This lack of immediate response may have been due to uncertainty caused by coordinated currency intervention from the US and Japan, which clouded whether the dollar's decline would be a sustained negative factor for gold. Gold only started its rally yesterday, with gains extending into the Asian session today. With no significant bullish news for gold, we interpret this move as a "catch-up rally" to the prior dollar weakness.

The ongoing debate about whether the Federal Reserve will raise interest rates, and when, remains the market's central focus and a key determinant of the US Dollar Index's medium-term trajectory. Yesterday, Minneapolis Federal Reserve President Neel Kashkari stated: "It's time to start gradually raising the policy rate. I am not calling for a massive rate hike. My goal is not to slow the economy but to achieve a 2% inflation rate." Kashkari's explicit support for rate hikes is a notable departure from his previous stance and may signal growing concern within the Fed about the risks of elevated inflation.

Looking at the data, the PCE Price Index shows a strong correlation with the Fed's rate path, with PCE often leading the interest rate curve at cyclical highs and lows. Beginning in September 2024, however, a divergence appeared: the Fed continued to cut rates while inflation steadily rose. This divergence has become more pronounced following the start of the US-Iran conflict, especially after the US PCE rate climbed to a cyclical high of 3.4%. Given that inflation data tends to lead policy changes, this could suggest the Fed may adopt a tightening stance in the second half of the year.

A key risk to this outlook is a potential peace agreement between the US and Iran, which is currently under negotiation. If the Strait of Hormuz reopens, international crude oil prices could fall sharply, significantly dragging down US inflation. Should inflation drop below the Fed's 2% target, the probability of rate hikes would diminish substantially, and the market could even begin to price in potential rate cuts.

In summary, while gold's current rally can be characterized as a catch-up move, its sustainability hinges on the near-term performance of the US Dollar Index. Whether the uptrend can continue will depend on the US inflation outlook and the Federal Reserve's monetary policy trajectory in the second half of the year. Market risk remains; all investments involve risk. This content reflects the analyst's personal views and does not constitute any investment advice. This report should not be considered the sole reference. The analyst's views may change over time without further notice.