Fed Rate-Cut Expectations Keep Gold Prices Near Record Levels

Gold prices edged higher on Thursday, buoyed by growing anticipation of a potential interest rate cut by the U.S. Federal Reserve in September.

As of 1448 GMT, spot gold rose by 0.3% to $2,466.33 per ounce, just shy of the all-time high of $2,483.60 reached on Wednesday. Similarly, U.S. gold futures climbed 0.4% to $2,469.70 per ounce.

Analysts project long-term gains for gold, driven by the Federal Reserve’s preparations to cut rates, under the belief that inflation is under control,” noted Russell Shor, senior market specialist at Tradu.

Shor also highlighted that geopolitical instability and sustained central bank demand are contributing to a favorable medium- to long-term outlook for gold.

Market sentiment is overwhelmingly confident about a rate cut, with the CME FedWatch Tool indicating a 100% chance of a U.S. rate cut in September. Gold, which does not yield interest, typically benefits in a low-interest-rate environment.

Data from the U.S. Labor Department revealed that the number of Americans filing new unemployment claims increased more than expected last week. However, there has been no significant shift in the overall labor market.

Contrary to market expectations, the International Monetary Fund advised that the Fed should wait until late 2024 before considering any rate cuts.

Meanwhile, the European Central Bank kept interest rates steady, as expected. ECB President Christine Lagarde commented that a rate move in September remains “wide open.”

Safe-haven demand for gold has been bolstered by concerns from China, partly due to negative rhetoric from both U.S. presidential candidates, according to Jim Wyckoff, senior market analyst at Kitco Metals. Furthermore, the World Gold Council reported that global physically-backed gold exchange-traded funds (ETFs) saw their second consecutive month of inflows in June.

Other precious metals saw declines: spot silver fell by 0.5% to $30.15 per ounce, platinum dropped 0.8% to $986.45, and palladium decreased by 1.6% to $936.25.

Analysis:

The anticipation of a Fed rate cut is a significant driver for the current bullish trend in gold prices. Lower interest rates reduce the opportunity cost of holding non-yielding assets like gold, making it more attractive to investors. Additionally, ongoing geopolitical tensions and strong central bank demand further support gold’s appeal as a safe-haven asset.

Investors should consider the broader economic indicators and the Fed’s monetary policy signals when evaluating the potential for profit in gold investments. The labor market data, while slightly disappointing, does not suggest a drastic downturn, which may influence the timing and magnitude of any Fed rate cuts.