Gold (XAU/USD) surged to a new all-time high of $2,482 during the Asian session on Wednesday. The rise in gold prices is attributed to growing expectations of US interest rate cuts in September and increased demand from buyers on the Shanghai Futures Exchange (SHFE), according to analysts at TD Securities.
Fed Rate Cut Expectations Bolster Gold
Anticipation of a rate cut by the US Federal Reserve (Fed) is a significant bullish factor for gold, as lower interest rates reduce the opportunity cost of holding this non-interest-bearing asset. Gold’s upward movement intensified after Fed Board of Governors member Adriana Kugler suggested a possible rate cut “later this year” during a speech at the Peterson Institute for International Economics on Tuesday. Kugler highlighted signs of a cooling labor market and potential rebalancing, suggesting further labor market deterioration could prompt the Fed to lower rates.
The Nonfarm Payrolls report for June showed the unemployment rate rising to 4.1%, higher than the expected 4.0%, marking the third consecutive month of increasing unemployment and the highest level since November 2021. The Fed’s dual mandate of achieving target inflation (2.0%) and full employment underpins these considerations.
Further reinforcing this outlook, Federal Reserve Chairman Jerome Powell, in his remarks on Monday, noted the progress in reducing inflation and hinted at potential rate cuts. The CME FedWatch tool, which calculates the probability of future rate changes based on 30-day Fed Funds futures, now indicates a 100% chance of at least a 0.25% cut in the Fed Funds rate to an upper band of 5.25% in September. This marks a significant shift from the previous week when probabilities were just above 60%.
Inflation Data Supports Rate Cut Scenario
US inflation data has also supported the rate cut narrative. The Consumer Price Index (CPI) for June fell to 3.0%, below expectations, while the Personal Consumption Expenditures (PCE) inflation data – the Fed’s preferred measure – showed both core and headline inflation rising only 2.6% in May, again undershooting economists’ expectations.
Strong SHFE Demand Drives Gold Higher
Gold’s rise is further supported by robust buying on the Shanghai Futures Exchange (SHFE). According to TD Securities, top traders on the SHFE have resumed their heavy buying, adding over 10 tonnes of gold to their positions in the last five trading sessions. This renewed interest has driven SHFE gold positioning towards previous all-time highs set in the first quarter of 2024.
Daniel Ghali, Senior Commodity Strategist at TD Securities, noted that discretionary traders are also increasing their positions in Comex Gold, potentially benefiting from both the expectation of Fed rate cuts and the so-called “Trump trade.”
In summary, gold’s new all-time high is driven by firming expectations of a US rate cut in September, strong demand from SHFE buyers, and supportive inflation data, suggesting that the current bullish trend in gold is likely to continue.
