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On Monday, gold prices reached an all-time high during Asian trade, marking an extension of recent gains. This surge attributed to market speculation that the Federal Reserve may commence interest rate cuts as early as March 2024. Despite a sense of caution among central bank officials, the yellow metal experienced significant appreciation in recent sessions. Contributing factors include diminishing inflation, soft labor market data, and less-hawkish signals from the Fed, reinforcing expectations of a potential rate cut in early 2024.
Fed Comments and Geopolitical Tensions Drive Gold Demand and Expectations.
The immediate demand for gold was further propelled by an incident involving an attack on an American warship and commercial vessels in the Red Sea. Heightening concerns about a potential escalation in the Israel-Hamas conflict. Despite Federal Reserve Chair Jerome Powell’s statement on Friday that U.S. rates would remain elevated for an extended period. As his acknowledgment of progress in curbing inflation and the possibility of a “soft landing” for the U.S. economy strengthened expectations that the Fed might not raise interest rates in December and could start cutting them by March 2024.
Also Read: US Stock Wavering Amid Strong Tensions Of Red Sea Attacks
Gold Prices Reach New Highs: Substantial Increase in Spot Gold and Futures
Spot gold Prices experienced a substantial increase of nearly 2%. Reaching a record high of $2,148.78 per ounce. While February gold futures also rose by 2% to a record high of $2,151.20 per ounce. Both instruments showed a slight decline from their peaks by 19:16 ET (00:16 GMT). Gold demonstrated robust gains last week and sustained a consecutive monthly increase in November.
Looking ahead, Fed Fund futures prices indicate a 97% probability that the Fed will maintain rates in December. With a 60% chance of a 25-basis-point rate reduction to a range of 5% to 5.25%. This contrasts with the 21% probability assigned by traders for a March rate cut just one week ago.
Gold’s Prospects Brighten as Rate Cut Anticipation Grows, Despite Economic Indicators on the Horizon
The anticipation of a reduction in interest rates viewed favorably for gold. As higher rates typically elevate the opportunity cost of investing in the precious metal. This concept had adversely affected bullion prices over the past year during the Fed’s aggressive interest rate hikes.
However, market participants still face various economic indicators in the interim. Nonfarm payrolls data for November, a pivotal measure of the labor market, expected later this week, alongside inflation readings for the remainder of the year in the coming weeks. While certain aspects of the labor market remain robust, and inflation continues to exceed the Fed’s annual target, persistent trends in these areas could diminish the likelihood of an early rate cut.
The Federal Reserve is scheduled to convene in mid-December.
