Spot gold price rises to record high after dovish Federal Reserve comments

(Bloomberg) — Gold surpassed its previous all-time high in the midst of the pandemic amid growing expectations for U.S. interest rate cuts early next year, despite the Federal Reserve’s attempts to temper optimism.

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The precious metal rose more than 3% in early trading on Monday, surpassing the previous all-time high set on August 7, 2020, before paring much of those gains.

The ongoing bullion rally since early October peaked on Friday when Federal Reserve Chairman Jerome Powell’s comments that monetary policy was “in restrictive territory” sent the dollar and Treasury yields lower, a positive for minor gold.

Powell then tried to walk back the optimism about lower interest rates, warning that “it would be too early to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when we will ease policy.” Despite this, swap markets now see about a 55% chance of a cut in March and are pricing in a full cut in May.

Chris Weston, head of research at Pepperstone Group Ltd, said there was a “huge shift in momentum” for gold. However, US employment data later this week could pose an element of downside risk for bullion, with bets on real interest rates falling next year. He said it seemed very aggressive.

Gold rose 0.7% to $2,086.67 an ounce as of 10:31 a.m. in Singapore, after a 1.8% increase on Friday. Bullion’s 14-day RSI is now well above the limit indicating that it may be overbought. The Bloomberg Dollar Spot Index was flat, while silver, platinum and palladium fell.

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The metal has risen about 15% from the lowest level recorded in early October. It benefited from a wave of safe-haven buying in the wake of the Hamas attack on Israel, and then, in recent weeks, the rally got additional impetus from rising expectations for a cut in US interest rates. It was reinforced by a 60 basis point decline in the 10-year US Treasury yield and a nearly 3% decline in the dollar measure during November.

Shares of gold mining companies also rose. Newmont Corp rose as much as 3.6% in Sydney, while Northern Star Resources Ltd rose as much as 5.3%. Zijin Mining Group Co. shares jumped 6.4% in Hong Kong.

The precious metal is trading at a significant premium to its price models based on its historical relationship to the dollar and Treasuries. This dynamic has continued throughout most of last year, driven by record purchases by central banks, which has helped bullion outpace persistent outflows by gold-backed ETFs.

ETF holdings have fallen sharply since the end of May, but have shown signs of stabilization since mid-October. However, it declined last week after a string of five weekly gains.

Daniel Haynes and Soni Kumari, analysts at ANZ Group Holdings Ltd, said in a note that rising real prices due to lower inflation versus fixed rates could be a drag on gold investment in the first quarter of 2024. They said net speculative long positions rebounded strongly, but ETF holdings have not seen a significant rise yet.

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