(Bloomberg) — Gold prices soar to record highs as the U.S. Federal Reserve signals it is close to cutting interest rates, also driven by geopolitical tensions and strong Chinese demand. This spurred the rise in the market.
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After hitting a series of record highs in recent trading, bullion prices soared to $2,265.73 an ounce on Monday, up 1.6% from Thursday’s close.
The Fed’s favorite measure of underlying inflation, the Core Personal Consumption Expenditure Index, slowed in February when many markets were closed, data showed. Despite the central bank’s cautious stance, this provides a rationale for reducing borrowing costs.
A number of positive factors have pushed up the bullion market by about 14% since mid-February. Prospects for monetary easing by major central banks and rising tensions in the Middle East and Ukraine supported the rally. Chinese consumers are also stocking up on bullion amid ongoing problems in Asia’s largest economy, while China in particular has seen strong central bank buying.
Fed Chairman Jerome Powell responded to the inflation data, saying the results were “very much in line with our expectations” and that there was no need to rush to cut interest rates. Later this week, investors will have another chance to gauge the outlook for the U.S. economy and central bank policy. Monthly wages are expected to increase by at least 200,000 for the fourth consecutive month.
Swaps markets are pricing in a 61% chance that the Fed will cut rates in June, up from 57% on Thursday. Lower interest rates are generally positive for gold, which doesn’t pay interest.
Warren Patterson, head of commodity strategy at ING Group, said: “Inflation data, particularly Powell’s comments, are providing further support for gold, and there is growing confidence in the market that the Fed will start cutting interest rates in June.” ” he said. However, he said, “We don’t need a big trigger to see a rebound in the short term,” and that the U.S. employment report could be stronger than expected.
Chinese demand
Spot gold in Singapore rose 1.4% to $2,261.14 an ounce at 3:37 p.m., after rising 3% last week. The 14-day Relative Strength Index is near 79, above the 70 level, which indicates price increases may be too much and too fast for some investors. The Bloomberg Dollar Spot Index fell 0.1%, while silver, platinum and palladium all rose.
Demand for gold in China has been significant in recent quarters. The country’s central bank has added significant amounts of bullion to its reserves, increasing its holdings in each of the past 16 months. Additionally, buying gold is gaining popularity among young Chinese.
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The metal’s positive outlook is supported by a number of major banks. Among them, JPMorgan Chase & Co. said last month that the metal was a frontrunner in the commodity market and that prices could reach $2,500 an ounce this year. Goldman Sachs Group Inc. said it sees the possibility of a rise to $2,300, emphasizing the benefits of the low interest rate environment.
Still, the soaring price has yet to resonate with investors who prefer exposure to gold through exchange-traded funds. Global holdings of bullion-backed ETFs fell by more than 100 tonnes in the first quarter, hitting their lowest level since 2019 in mid-March, but have since risen slightly, according to a Bloomberg tally.
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