Gold prices surged to a new six-month high on Tuesday, breaking the $2,060 an ounce level, as investors anticipated that the U.S. Federal Reserve would start cutting interest rates by early 2024. The precious metal has been on a bullish streak since last week, when the Fed signaled a more dovish stance and a softer-than-expected inflation report reinforced the case for lower rates.
One of the main drivers of gold’s rally was the weakness in the U.S. dollar, which fell to a near five-month low on Tuesday. A weaker dollar makes gold cheaper for holders of other currencies and boosts its appeal as an alternative asset. The dollar index, which measures the greenback against a basket of six major currencies, was down 0.2% at 92.15 by 10:10 a.m. ET (1510 GMT).
Another factor that supported gold was the decline in U.S. Treasury yields, which reduce the opportunity cost of holding non-yielding bullion. The benchmark 10-year yield was down 2 basis points at 1.43%, near its lowest level since October. Lower yields also reflect lower expectations of inflation, which erodes the value of gold over time.
Investors bet on early rate cuts by the Fed
The main catalyst for gold’s rally, however, was the growing expectation that the Fed would start cutting interest rates by as soon as March 2024, following its dovish policy statement last week and a disappointing inflation report on Friday. The Fed said it would end its bond-buying program by March 2024, but also indicated that it was not in a hurry to raise rates, citing the risks posed by the Omicron variant of the coronavirus and the uncertainty over inflation.
On Friday, the U.S. Commerce Department reported that the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, rose 4.7% year-on-year in November, below the consensus estimate of 4.9%. The core PCE price index, which excludes food and energy, rose 4.5% year-on-year, also below the forecast of 4.7%.
The softer-than-expected inflation data boosted the odds of a rate cut by the Fed in March 2024, according to the CME FedWatch tool, which showed an 85% probability of a 25 basis point cut. Some analysts, such as Goldman Sachs (NYSE: GS), predicted that the Fed would follow up with two more cuts in the first half of 2024, and another two cuts later in the year.
Gold outlook remains positive for 2024
Analysts and traders remained optimistic about gold’s prospects for 2024, citing the likely impact of lower interest rates, weaker economic growth, and higher demand for safe-haven assets. Jim Wyckoff, senior analyst at Kitco Metals, said that gold could see more upside action in the first quarter of 2024, as speculators climb aboard the long side, thinking that the metals markets are due for some more upside action.
Wyckoff added that the likely less restrictive monetary policies in 2024 would mean better commercial demand for precious metals, especially from emerging markets such as China and India, the top consumers of gold. However, he also warned that resurgent inflation or more economic weakness in China could dampen his bullish outlook.
Exinity Chief Market Analyst Han Tan said that gold should find adequate reasons to remain supported above the psychologically important $2,000 level, as long as the Fed can stay the course with its intended rate cuts next year. He also noted that gold could benefit from the increasing demand for electric vehicles, which use gold in their batteries and electronics, as well as from the tightening supply of the metal due to mine closures in Panama and Peru.
