In Asian trade on Monday, gold prices reached a historic high, experiencing a surge in recent gains. The market anticipates the Federal Reserve’s potential move to cut interest rates as early as March 2024, despite central bank officials maintaining a cautious approach.
The surge in gold’s value has been notably driven by factors such as easing inflation, soft labor market data, and less-hawkish signals from the Federal Reserve. Speculation regarding a rate cut in early 2024 has intensified due to these indicators.
Near-term demand for gold received an additional boost following an attack on an American warship and commercial vessels in the Red Sea, raising concerns about a potential escalation in the Israel-Hamas conflict.
Federal Reserve Chair Jerome Powell, in his Friday speech, reiterated the expectation that U.S. rates would remain higher for an extended period. However, subtle shifts in his communication, acknowledging progress in curbing inflation and hinting at a “soft landing” for the U.S. economy, fueled expectations that the Fed might refrain from raising interest rates in December and possibly initiate cuts by March 2024.
Spot gold experienced a nearly 2% surge, reaching a record high of $2,148.78 per ounce, while February gold futures also rose by 2%, hitting a record high of $2,151.20 per ounce. Both instruments traded slightly off their peaks by 19:16 ET (00:16 GMT).
The yellow metal demonstrated robust gains throughout the previous week and recorded a consecutive monthly rise in November.
Market expectations point towards a rate cut by the Fed in March, with the Fed Fund futures pricing indicating a 97% chance of rates remaining unchanged in December. There is a 60% probability that the central bank might trim rates by 25 basis points to a range of 5% to 5.25%, according to CME Group’s Fedwatch tool. This is a significant shift from the 21% chance priced in for a March cut just one week ago.
The prospect of easing interest rates is viewed favorably for gold, as higher rates increase the opportunity cost of investing in the precious metal. This notion had adversely impacted bullion prices over the past year as the Fed pursued aggressive interest rate hikes.
Despite the positive outlook for gold, markets are still navigating various economic signals. Key data, including nonfarm payrolls for November – a crucial labor market indicator, and inflation readings for the remainder of the year, are scheduled for release in the coming weeks.
While certain aspects of the labor market remain robust, and inflation continues to hover comfortably above the Fed’s annual target, the persistence of these trends may influence the likelihood of an early rate cut.
