Gold continues to probe historic highs this week: the precious metal surpassed $2,265 per ounce in trading on Monday. This rapid surge is attributed to a series of factors shaking global financial markets. At time of writing on Wednesday gold was bid at $2,260.62 per oz.
Firstly, there has been growing optimism regarding the possibility of interest rate cuts in the United States. Despite initially solid economic data seeming to dampen these expectations, gold has notably continued its ascent. The ISM Manufacturing Index for March was surprised by an unexpected expansion, reaching 50.3, exceeding projections of 48.5.
However, the March Manufacturing PCE Price Index showed a more significant deceleration than anticipated, marking 51.9 compared to expectations of 52.5, hinting at a possible deflationary trend. With anticipation that the first Fed rate cut will materialize in June, a climate of uncertainty and volatility has been generated in financial markets.
Furthermore, geopolitical tensions have significantly influenced the price of gold. The recent Israeli attack near the Iranian embassy in Syria has exacerbated concerns about stability in the region. This event has strengthened the appeal of gold as a haven for investors amid uncertainty. As a result, financial markets have seen increased demand for this precious metal.
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Why is the gold price on such a run?
“This rise in the price of gold reflects growing economic and political uncertainty and the perception that the precious metal is a reliable store of value in times of crisis,” said Ernesto Di Giacomo, a market analyst with XS.com. “Investors turn to gold as a safe asset to protect their portfolios against market volatility and currency depreciation.”
As gold continues its ascent, experts are divided on whether this bullish trend will persist in the long term. Some believe that gold could continue to rise, especially if geopolitical tensions and economic concerns persist. Others are more cautious and point out that the gold market is also subject to fluctuations and corrections.
In conclusion, the record reached by gold last Monday is a clear symptom of the economic and political turmoil shaking global markets. As investors seek a haven amid uncertainty, gold is emerging as an attractive and trustworthy asset. However, market volatility and fluctuations are constant reminders that no investment is risk-free.
The rising expectations for the Federal Reserve to cut interest rates, especially after two years of rate hikes, could impact interest-bearing assets such as US bonds and enhance the value of gold investments as well. However, yields on the US 10-year Treasury bonds have slightly risen, amidst the US Dollar Index (DXY) holding around 104.50 points. This implies that the upward trend remains limited due to strong expectations of Federal rate cuts, while uncertainty ahead of the US nonfarm payrolls report and labor market data curbs the downward trend.
Demand for gold remains high
Gold prices are transitioning to sideways trading after hitting an all-time high near $2260. Demand for gold remains high with escalating geopolitical tensions worldwide and increasing market expectations for the Fed to start an interest rate-cutting cycle soon. Traders see a 68% chance of interest rate cuts announcement in June, up from 60% before the release of core personal consumption expenditure inflation data for February on Friday, according to data from XS.com.
While Federal Reserve Chair Powell remains confident in progress in mitigating inflation, he acknowledged the bank’s lack of need to rush in cutting interest rates given the strength of the economy and current labor market data. He emphasized the need for more progress on inflation before rate cuts. He cautioned against rushing on the timing of rate cuts, citing strong economic conditions and the labor market.
It’s noteworthy that US monthly and yearly core personal consumption expenditure inflation rose by 0.3% and 2.8% in February, as expected. However, January estimates were revised upward to 0.5% monthly and 2.9% yearly from previously estimated increases of 0.4% and 2.8%, respectively, bringing the Federal Reserve’s preferred inflation gauge to its lowest level in nearly two years, supporting current interest rate cut expectations.
The US nonfarm payrolls report for March, scheduled for release on Friday, is the key event to watch this week as it’s likely to provide more clarity on when the Federal Reserve might start cutting interest rates and whether cuts will indeed occur this year.
