Gold Prices Soar as Rate Cut Expectations Mount
On Monday, gold prices continued their upward trajectory, smashing through a new all-time high to above $3,610 per ounce, propelled by a surprisingly weak US non-farm payrolls report and increasing market expectations that the Federal Reserve will cut interest rates.
After a 27% rise in 2024, gold prices have surged 37% so far this year, fueled by a weaker dollar, central bank buying, expectations of Fed rate cuts, and broader geopolitical and economic uncertainty. A key US non-farm payrolls report last Friday revealed a slowdown in hiring and an unemployment rate that rose to 4.3%, the highest level since 2021, confirming a softening labor market.
This prompted traders to increase their bets on rate cuts, now anticipating the Fed will cut rates nearly three times in the remainder of this year. Investment banks have also piled in on Fed rate cut bets this year, with Bank of America rushing to "tear up its report", predicting the Fed will cut rates twice this year, up from a previous expectation of no cuts. Standard Chartered expects a 50-basis-point rate cut in September, up from a previous expectation of a 25-basis-point cut in September. Macquarie brought forward its December rate cut expectations to October, and Barclays expects the Fed to cut rates consecutively this year.
"The main driver has been the US jobs data, and now the market is pricing in that the Fed might cut 50 basis points in September. While it’s a small possibility, it’s a substantial shift compared to where things were before the jobs data came out. Gold is currently facing essentially no headwinds, and unless there’s an inflation shock this week, $3,600 won’t be a problem," said Kyle Rodda, a financial market analyst at Capital.com. According to the CME Group's FedWatch tool, traders have fully priced in a 25-basis-point rate cut this month and see an 8% chance of an ultra-aggressive 50-basis-point cut.
Lower borrowing costs tend to increase the appeal of non-yielding gold, while strong safe-haven demand has also supported gold due to concerns about the Fed's future independence. Looking ahead, market expectations of Fed rate cuts will still be tested this week as the US is due to release employment data benchmark revisions on Tuesday and producer and consumer inflation data (PPI and CPI) on Wednesday and Thursday, which may provide further clarity for the Fed. Traders will also be watching how the market digests the auctions of 3-year, 10-year, and 30-year US government bonds.
On the central bank buying front, the People's Bank of China increased its gold reserves again in August, for the 10th consecutive month. Gu Fengda, an analyst at Guoxin Futures, said that the central bank's steady increase in gold holdings is continuously releasing long-term allocation demand for gold assets, providing structural support for gold prices from the level of official reserves, helping to enhance market confidence in gold allocation, and has a positive impact on the medium- and long-term gold price trend.
B2PRIME Group founder and executive director Eugenia Mykuliak said people are raising more questions about the safety of common safe-haven assets. "The risks to US Treasuries and the dollar are greater than ever, so gold has now become a backup choice," she said. "Technical momentum is also supporting this move, and I expect gold prices to move towards the next target range, which is $3,600-$3,800, while $4,000 will be a realistic peak."
Factors Influencing Future Gold Prices
Several factors could influence gold prices in the future, including:
* **Federal Reserve Monetary Policy:** Any shift in the Federal Reserve's monetary policy path, whether related to interest rates or quantitative easing programs, can significantly impact gold prices.
* **Inflation:** Gold is often seen as a hedge against inflation, so rising inflation can lead to increased demand for gold and, consequently, higher prices.
* **Global Economic Growth:** Global economic growth can affect the demand for gold, as strong growth can lead to increased demand for jewelry and other goods containing gold.
* **Geopolitics:** Geopolitical events, such as wars and conflicts, can increase demand for gold as a safe haven, potentially driving prices higher.
* **Strength of the US Dollar:** Gold is often priced in US dollars, so a weaker dollar can lead to higher gold prices.
* **Other Central Bank Decisions:** Beyond the Federal Reserve, decisions by other central banks regarding interest rates and gold purchases can also affect gold prices.
* **Supply and Demand Dynamics:** Changes in the supply of and demand for gold - including gold mining and recycling - directly affect prices. Lower supply can drive prices higher, while increased supply can drive prices lower.
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