In a noteworthy surge, gold prices in Asian trade soared to a nearly seven-month high on Wednesday, influenced by dovish signals from Federal Reserve officials.
The weakening U.S. dollar, nearing four-month lows, and a decline in U.S. Treasury yields further bolstered the strength of gold, with the 10-year rate reaching a two-month low during Asian trade.
- Gold prices take advantage of a weaker dollar amid the Fed’s dovishness.
- The rate cut expectations in 2024 have fueled the demand for gold.
- Persisting inflation and fear of recession may hinder the Fed from a rate cut.
Concerns surrounding upcoming economic readings from the U.S. and China, coupled with weaker data from Japan and the Eurozone, have heightened safe-haven demand for gold.
As a result, spot gold saw a 0.1% increase, reaching $2,044.08 per ounce, while December futures gained 0.2% to $2,044.20 per ounce. The price is slowly going north to test the all-time highs. Interestingly, the last 6 out of 8 weeks have been bullish for the gold.
Gold weekly chart (Source: TradingView)
The recent upswing in gold is attributed to increasing bets on a Federal Reserve pivot. Federal Reserve officials, including Christopher Waller, have emphasized caution in maintaining higher interest rates.
Waller has suggested that a decline in inflation might prompt the Fed to loosen policy sooner than expected, with traders now pricing in a 40% chance of a rate cut by March 2024.
The prospect of a shift in the Fed’s stance has propelled gold throughout November, with market sentiment favoring the precious metal in anticipation of potential rate cuts. The weakness in the U.S. dollar and declining U.S. 10-year bond yields have further supported the upward trajectory of gold prices.
As Federal Reserve officials hinted at possible rate cuts, gold extended its gains, reaching the highest level since May. Governor Christopher Waller’s comments have fueled expectations of interest rate cuts in 2024.
Nevertheless, there exists a divergence in views on the economic outlook. Some analysts anticipate a “soft landing,” expecting proactive rate cuts by the Fed to prevent a recession. Conversely, some economists express skepticism, foreseeing a hard landing irrespective of Fed actions.
Market expectations for rate cuts starting in January 2024 contradict the Fed’s position, with Chairman Jerome Powell emphasizing a higher likelihood of rate hikes rather than cuts. Despite the Fed’s liquidity injections to banks, concerns arise from declining monetary aggregates (M1 and M2).
Saqib Iqbal, a financial market analyst at Trading.Biz, said, “The discrepancy between declining monetary aggregates and increased borrowings from the Fed presents challenges for inflation and the productive sector. If inflation persists, the Fed may hesitate to cut rates, potentially leading to further deterioration in the private sector.”
In conclusion, while expectations of Fed rate cuts prevail, the actual effectiveness of such measures remains uncertain. The disparity between market expectations and the Fed’s position raises questions about the potential impact on inflation, the economy, and the private sector.