Gold surged to unprecedented heights as indications of potential interest rate cuts by the Federal Reserve added momentum to a rally fueled by geopolitical tensions and robust demand from China.
On Monday, bullion reached a pinnacle of $2,265.73 per ounce, marking a 1.6% increase from Thursday’s closing, following a series of recent peaks.
The Federal Reserve’s favored gauge of core inflation, the core personal consumption expenditures index, exhibited a cooling trend in February according to Friday’s data, coinciding with many market closures. This development bolsters the case for a reduction in borrowing costs, despite the central bank maintaining a cautious stance.
A confluence of factors has propelled bullion approximately 14% higher since mid-February. Expectations of monetary easing by major central banks, heightened tensions in regions like the Middle East and Ukraine, alongside significant buying by central banks, notably in China, have contributed to the rally. Moreover, consumers in China have intensified their purchases of bullion amidst ongoing economic challenges in the region.
Fed Chair Jerome Powell characterized the inflation figures as “pretty much in line with our expectations,” tempering expectations for an immediate rate cut. Investors will closely scrutinize upcoming events this week to gauge the trajectory of the US economy and central bank policy, with monthly payrolls expected to extend their rise for the fourth consecutive month, by at least 200,000.
Swaps markets are now pricing in a 61% probability of a Fed rate cut in June, up from 57% on Thursday. Lower interest rates typically bode well for gold, which lacks interest-bearing attributes.
Warren Patterson, head of commodities strategy at ING Groep NV, noted that “Inflation data, and Powell’s comments in particular, have provided a further boost to gold, with the market becoming increasingly convinced that the Fed will start to cut rates in June.” However, Patterson cautioned that “it wouldn’t take much of a catalyst to see a pullback in the short term,” citing the potential impact of a stronger-than-expected US jobs report.
In terms of Chinese demand, spot gold rose 1.4% to $2,261.14 an ounce, reflecting a 3% increase last week. The metal’s 14-day relative-strength index hovered around 79, indicating to some investors that prices may have escalated excessively fast. Meanwhile, the Bloomberg Dollar Spot Index experienced a marginal decline, while silver, platinum, and palladium all traded higher.
Recent quarters have witnessed pronounced gold demand in China, with the nation’s central bank consistently augmenting its bullion reserves over the past 16 months. Additionally, gold-buying has gained traction among younger Chinese demographics.
Despite its stellar performance, gold’s ascent has yet to resonate with investors preferring exposure through exchange-traded funds (ETFs). Global holdings in bullion-backed ETFs contracted by over 100 tons in the first quarter, reaching their lowest level since 2019 in mid-March, before experiencing a slight uptick, as per a Bloomberg assessment.
