Gold shot past a previous all-time high set in the midst of the pandemic on growing expectations for US rate cuts early next year, despite attempts by the Federal Reserve to temper the optimism.
The precious metal surged more than 3% in early trading on Monday, surpassing the previous all-time high it set on Aug. 7, 2020, before paring much of those gains.
A rally in bullion that’s been underway since early October was turbocharged on Friday when comments by Fed Chair Jerome Powell that monetary policy is “well into restrictive territory” spurred a plunge in the dollar and Treasury yields, a positive for non-interesting bearing gold.
Powell then attempted to push back against the rate-cut optimism, warning that “it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.”
Despite that, swaps markets now see around a 55% chance of a reduction in March and are fully pricing in a cut in May.
There’s been “a big momentum shift” on gold, said Chris Weston, head of research at Pepperstone Group Ltd. However, US labor data later this week could pose an element of downside risk to bullion, with bets on lower real rates into next year looking very aggressive, he said.
Gold rose 0.7% to $2,086.67 an ounce as of 10:31 a.m. in Singapore, following a 1.8% increase 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 was steady, while silver, platinum and palladium all edged lower.
Bullion has surged around 15% from a low in early October. It benefited from a spate of haven buying following the Hamas attack on Israel, and then, in recent weeks, the rally got extra impetus from the growing expectations for US rate cuts. It’s been bolstered by a drop of 60 basis points in the US 10-year Treasury yield and a decline of almost 3% in a gauge of the dollar over November.
Shares of gold miners were also up. Newmont Corp. rose as much as 3.6% in Sydney, while Northern Star Resources Ltd. climbed as much as 5.3%. Zijin Mining Group Co. jumped as much 6.4% in Hong Kong.
The precious metal is trading at a hefty premium to models of its price based on its historic relationship with the dollar and Treasuries. That dynamic has persisted for most of the past year, driven by record buying by central banks, which helped bullion weather persistent outflows by gold-backed exchange traded funds.
ETF holdings have fallen sharply since the end of May, but have shown signs of stabilizing since mid-October. However, they fell last week following a run of five weekly gains.
Rising real rates due to retreating inflation against steady rates could be a drag on gold investment in the first quarter of 2024, ANZ Group Holdings Ltd. analysts Daniel Hynes and Soni Kumari said in a note. Speculative net-long positions have rebounded strongly, but ETF holdings are yet to see a material lift, they said.