Gold shot past a previous all-time high set in the midst of the pandemic on growing expectations of US interest rate cuts early next year, despite attempts by the Federal Reserve to tamp down optimism.
The precious metal surged more than 3% in early trading on Monday, surpassing the previous all-time high set on 7 August 2020, before paring much of those gains.
A rally in bullion that’s been underway since early October was given a boost on Friday when comments from Fed Chair Jerome Powell that monetary policy was “well into restrictive territory” spurred a plunge in the dollar and Treasury yields, a positive for non-interest-bearing gold.
Powell then attempted to tamp down the rate cut optimism, warning that “it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance or to speculate about when policy might be removed”. Despite this, swaps markets are now pricing in around a 55% chance of a cut in March and are fully pricing in a cut in May.
There’s been a “big shift in momentum” for gold, said Chris Weston, head of research at Pepperstone Group Ltd. However, US labour data later this week could pose an element of downside risk for bullion, with bets on lower real interest rates into next year looking very aggressive, he said.
Gold was up 0.7% at $2,086.67 an ounce as of 10:31 a.m. in Singapore, having risen 1.8% on Friday. Gold’s 14-day Relative Strength Index is now well above the level that suggests it may be overbought. The Bloomberg Dollar Spot Index was steady, while silver, platinum and palladium were all lower.
Gold bullion has rallied around 15% from its early October lows. It benefited from a wave of safe-haven buying following the Hamas attack on Israel, and in recent weeks the rally has been boosted by growing expectations of US interest rate cuts. It’s been supported by a 60 basis point drop in the US 10-year Treasury yield and a nearly 3% drop in a measure of the dollar over November.
Shares in gold miners were also higher. Newmont Corp. rose as much as 3.6% in Sydney, while Northern Star Resources Ltd. gained as much as 5.3%. Zijin Mining Group Co. jumped as much as 6.4% in Hong Kong.
The precious metal trades at a hefty premium to models of its price based on its historical relationship with the dollar and Treasuries. This dynamic has persisted for most of the past year, driven by record central bank buying, which has helped bullion weather sustained outflows from gold-backed exchange traded funds.
ETF holdings have fallen sharply since late May, but have shown signs of stabilising since mid-October. However, they fell last week after a run of five weekly gains.
Rising real interest rates due to receding inflation versus stable interest rates could be a drag on gold investment in the first quarter of 2024, ANZ Group Holdings Ltd. analysts Daniel Hynes and Soni Kumari said in a note. Speculative net-long positions have rebounded strongly, but ETF holdings have yet to see a material increase, they said.
