Dec 04, 2023

Gold prices surged to a record high in Asian trade on Monday, extending a raft of recent gains as markets bet the Federal Reserve could begin cutting interest rates as soon as March 2024, even as central bank officials remained cautious. 

The yellow metal appreciated sharply in recent sessions as easing inflation, soft labour market data, and some less-hawkish signals from the Fed fueled speculation that the bank would cut interest rates in early 2024.

Near-term demand for gold was also fueled by an attack on an American warship and commercial vessels in the Red Sea, which ramped up concerns over an escalation in the Israel-Hamas war.

On Friday, Chair Jerome Powell reiterated that US rates will remain higher for longer. But some changes in his signalling- mainly that he acknowledged the progress made towards curbing inflation and the potential for a “soft landing” for the US economy- reinforced expectations that the Fed will no longer raise interest rates in December and potentially begin cutting them by March 2024. 

XAUUSD Daily chart

XAUUSD Daily chart

Spot gold jumped nearly 2% to a record high of $2,148.78 an ounce, while February gold futures also jumped 2% to a record high of $2,151.20 an ounce. Both instruments were trading slightly off their highs by 19:16 ET (00:16 GMT). 

The yellow metal saw substantial gains last week and rose for a second consecutive month in November.

The Fed saw cutting rates in March, but more economic cues are on tap this week.

Fed Fund futures prices show a 97% chance the Fed will keep rates on hold in December and a 60% chance that the central bank will trim rates by 25 basis points to a range of 5% to 5.25%, according to CME Group’s Fedwatch tool. This compares to traders pricing in a 21% chance for a March cut one week ago.

The prospect of easing interest rates bodes well for gold, given that higher rates push up the opportunity cost of investing in the yellow metal. This notion had battered bullion prices over the past year as the Fed began aggressively hiking interest rates. 

But markets still have many economic signals to contend with in the interim. Nonfarm payrolls data for November- a vital gauge of the labour market- is due later this week, while inflation readings for the remainder of the year are also due in the coming weeks. 

Some facets of the labour market remain strong. At the same time, inflation also remains comfortably above the Fed’s annual target- a trend that, if persistent, diminishes the prospect of an early rate cut. 

The Fed is set to meet in mid-December.

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