In a low-volume Asian trade on Tuesday, gold prices surged, breaking free from the trading range observed throughout most of December. The catalyst for this breakout was soft U.S. inflation data, heightening expectations of early interest rate cuts in 2024. The yellow metal witnessed a robust series of gains in recent sessions, following a weaker-than-expected reading on the PCE price index, the Federal Reserve’s preferred inflation gauge.
The PCE inflation data, released after dovish signals from the Fed during its final meeting for 2023, fueled optimism that the central bank might initiate interest rate cuts as early as March 2024. This development boded well for gold, as high interest rates typically elevate the opportunity cost of investing in bullion.
Spot gold climbed 0.5% to $2,064.16 per ounce, while gold futures expiring in February registered a 0.3% increase to $2,075.10 per ounce by 23:58 ET (00:58 GMT). Notably, spot gold broke out of the $2,000 to $2,050 trading range established in December, bringing it within $100 of a record high of over $2,130 per ounce set at the beginning of the month.
The likelihood of rate cuts in March 2024 gained strength after the softer-than-expected PCE inflation data released on Friday. CME Group’s FedWatch tool indicated traders pricing in a more than 70% chance of a 25 basis point cut in March 2024. Goldman Sachs further predicted that the central bank would follow up a March cut with two additional cuts in the first half of 2024, followed by two more later in the year.
However, a cautionary note was sounded by several Fed officials, who warned that expectations of early rate cuts might be overly optimistic. Nevertheless, on Tuesday, the dollar slid to a nearly five-month low, accompanied by a decline in Treasury yields, contributing to the favorable conditions for gold.
Looking ahead, gold may continue to benefit from deteriorating global economic conditions in the coming year, as the impacts of tight monetary policy are felt by major economies. The precious metal remains a key asset to watch as it responds to shifting market dynamics and central bank actions.
