(Bloomberg) — Gold surged above a previous all-time high reached amid the pandemic on growing expectations for U.S. interest rate cuts early next year, despite attempts by the Federal Reserve to dampen 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, but then gave up much of those gains.
A gold rally that has been going on since early October got a boost on Friday when comments from Fed Chairman Jerome Powell that monetary policy was “well in restrictive territory” led to a collapse in the dollar and Treasury yields, which had a positive impact on interest-free rates Gold had an impact.
Powell then tried to push back against rate-cutting optimism, warning: “It would be premature to conclude with confidence that we have reached a sufficiently tight stance or to speculate about when monetary policy might be eased.” Still, see Swap markets currently have around a 55% chance of a March cut and are fully pricing in a May cut.
There has been a “big dynamic shift” in gold, said Chris Weston, head of research at Pepperstone Group Ltd. However, U.S. jobs data later this week could pose some downside risk for gold amid bets on lower real interest rates next year. It looked very aggressive, he said.
Gold prices rose 0.7% to $2,086.67 an ounce at 10:31 a.m. in Singapore, after rising 1.8% on Friday. Bullion’s 14-day Relative Strength Index is now well above the threshold, suggesting it may have been overbought. The Bloomberg Dollar Spot Index remained stable, while silver, platinum and palladium fell slightly.
Gold bullion is up around 15% since its low point in early October. It benefited from a flurry of refuge buying following the Hamas attack on Israel, and in recent weeks the rally has been given additional impetus by growing expectations of U.S. interest rate cuts. This was supported by a 60 basis point drop in the 10-year US Treasury yield and a nearly 3% drop in the dollar’s exchange rate in November.
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Shares of gold mining companies also rose. Newmont Corp. rose as much as 3.6% in Sydney, while Northern Star Resources Ltd. even increased by 5.3%. Zijin Mining Group Co. rose as much as 6.4% in Hong Kong.
The precious metal trades at a significant premium to its pricing models due to its historical relationship to the dollar and government bonds. That momentum continued for most of last year, driven by record central bank purchases that helped gold withstand ongoing outflows from gold-backed exchange-traded funds.
ETF holdings have declined sharply since late May but have shown signs of stabilization since mid-October. However, they fell last week after a streak of five weekly gains.
Rising real interest rates due to declining inflation versus stable interest rates could weigh on gold investments in the first quarter of 2024, said analysts Daniel Hynes and Soni Kumari of ANZ Group Holdings Ltd. in a note. Net speculative long positions have rebounded strongly, but ETF holdings have not yet seen a significant increase, they said.
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