Outlook for lower US interest rates and safe-haven demand push up prices
PUBLISHED : 17 Aug 2024 at 15:17
Gold has topped $2,500 an ounce for the first time, bolstered by hopes that the US Federal Reserve is edging closer to cutting interest rates.
Spot gold in New York climbed as much as 2.2% on Friday to $2,508.82, exceeding the previous record set last month, before easing back to around $2,498. The market was reacting to a disappointing reading on the US housing market, which reinforced expectations of faster and deeper cuts by the Fed.
Lower rates generally are positive for gold as it pays no interest. The prospect of falling interest rates tends to push down the dollar, making gold cheaper for holders of other currencies.
The afternoon fixing on Friday in London was $2,485.80 an ounce, compared with $2,427.35 a week earlier. The Thai Gold Traders Asssociation quoted local selling prices on Saturday at 41,000 baht per baht-weight (15.2 grammes), up by 200 baht from Friday and 450 baht from the previous week.
Gold prices are up more than 20% this year amid mounting optimism about monetary easing as well as large purchases by central banks. It also has seen increased demand as a safe-haven asset due to rising geopolitical risks, including tensions in the Middle East and Russia’s war with Ukraine.
Gold began shooting higher earlier in the year — surprising seasoned analysts and veterans as there was not always a clear macro catalyst to justify its price rally. It sustained those gains even as traders dialled back bets on the timing of rate cuts.
More recently, gold has ticked higher as the US central bank is widely expected to start lowering rates as soon as its September 17-18 meeting.
Recent US economic indicators have convinced markets that the Fed is on the verge of lowering borrowing costs from a more than two-decade high, with the conventional drivers for gold returning to the fore.
There is debate over how deep the rate cuts will be, given recent economic readings that offered conflicting signals on the state of the US economy. Most analysts foresee a cut of a quarter percentage point in September, but some believe the Fed might favour a half-point cut to give the economy a push.
Gold investors are “typically more prone to think the Fed will be more aggressive on the monetary accommodation front”, said Bart Melek, global head of commodity strategy at TD Securities.
Prices could rise further to $2,700 in the coming quarters, as “the macro/monetary and central bank ducks are aligning in a row,” he said.
Speculators boosted their net-bullish bets on Comex gold futures to a near four-year high in the week ending Aug 13, Commodity Futures Trading Commission data show. Meanwhile, gold holdings in exchange-traded funds have risen in recent months following two years mostly of outflows, data compiled by Bloomberg show.
Traders on Friday assessed the latest economic data for clues on the outlook for Fed policy. Figures showed new-home construction in the US fell in July to the lowest level since the aftermath of the pandemic as builders respond to weak demand.
It “is another indicator that a recession is on its way”, said Bob Haberkorn, senior market strategist at RJO Futures. The Fed will cut rates “and go further than what was expected before”.