Gold climbs to record high on Fed rate cut speculation

Gold prices surged to a record high as Federal Reserve Chair Jerome Powell’s remarks increased traders’ optimism that the U.S. central bank would finish its monetary policy tightening cycle and potentially begin cutting interest rates as early as March.

Spot gold prices gained 1.6 per cent to reach a high of $2,069.10 per ounce, as gold futures prices for delivery in the U.S. also rose to an all-time high of $2,089.70 per ounce. The week-on-week gain of 3.4 per cent for spot gold was driven by a number of factors, including a weakening U.S. dollar and growing geopolitical tensions. This surge took spot gold prices past the previous all-time high of $2,072.49 per ounce, which was reached in August 2020.

It is important to note that the recent records in gold prices are in nominal terms, meaning they do not take into account the effects of inflation. When gold prices are adjusted for inflation, the true all-time high was reached in early 1980, at a level equivalent to $3,452.40 an ounce in today’s dollars. This shows that while gold prices have reached new nominal highs, they have not yet surpassed the purchasing power of the all-time high reached in 1980.

Federal Reserve Chair Jerome Powell’s speech at Spelman College in Atlanta, in which he acknowledged the balanced risks of monetary tightening, gave gold bulls reason to be optimistic. While Powell cautioned against speculation on interest rate cuts, traders focused on his remarks that the current interest rate is in restrictive territory.

Market expectations for interest rate cuts in March and a rate below 4 per cent by the end of next year gained momentum, as the current Fed funds rate stands at 5.25 to 5.50 per cent. Lower interest rates reduce the opportunity cost of holding gold, since lower interest rates decrease the yield on other investments such as bonds. This makes gold more attractive as an investment.

In the wake of Powell’s comments and the changing expectations for interest rates, the yield on the benchmark 10-year U.S. Treasury bond fell to its lowest level in 12 weeks. At the same time, the value of the U.S. dollar fell 0.3 per cent as investors anticipated a weaker dollar due to lower interest rates.

Tai Wong, a metals trader based in New York, commented that gold bulls were focused on Powell’s statement that the current interest rate was “well into restrictive territory,” which played into the narrative that rate cuts would come sooner. However, Wong noted that this interpretation of Powell’s comments ignored his warning that it was too early to speculate on easing rates.

Everett Millman, the chief market analyst at Gainesville Coins, predicted that gold prices would continue to rise, following the so-called “Santa Claus rally,” a seasonal trend that has seen gold prices rise in the month of December in 16 out of the last 20 years.

Other precious metals also saw gains as silver prices climbed 0.9 per cent to a six-month high of $25.47 per ounce, the highest level since May. Platinum prices also rose 0.6 per cent to $932.44 per ounce, while palladium prices shed 0.3 per cent to $1,004.92 per ounce.