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Why did Gold prices hit a new record high?

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In periods of economic uncertainty, investors typically view gold as a safe haven

In recent trading, gold prices hit a new record high. However, on March 18, prices of the yellow metal fell in Asian trade as traders turned averse to non-yielding assets before more signals on interest rates from the United States and other parts of the world.

We all know that the commodity market is something which witnesses a lot of price volatility. In this article, we will try to find the cause of the surge. Was it due to a mere speculation around monetary policies? Or was it something else?

The price for spot gold price increased up to USD 2,141 per troy ounce. It has increased by about 16% over the 2023 and 5.6% over February 2024. The demand for gold remained strong through the 2023 end due to central banks’ continued purchases of it as a hedge against inflation.

Recent economic data might have increased investors’ expectations that central banks around the world will reduce interest rates dramatically this year, driving up the price of gold.

What’s The Fed Got To Do With Gold?

In periods of economic uncertainty, investors typically view gold as a safe haven. However, as interest rates rise and higher yields are available on bonds and other assets, the precious metal loses appeal because it offers no return on investment.

But over the 2023, as economic growth slowed, investors had become more and more confident that global central banks would cut interest rates. And in the first half of 2024, the expectation has only taken a bigger shape.

According to the CME Groups’ FedWatch Tool, which predicts rate movements based on fed funds futures trading data, nearly 70% of American investors now expect the Federal Reserve to start cutting interest rates in June 2024, up from 58%.

Despite the uncertainty surrounding the upcoming Presidential Election, moderating inflation has raised hopes for rate cuts.

According to a research note from Citi, uncertainty may keep driving up gold prices. Additionally, experts at Berenberg stated that a possible triumph for Donald Trump in the United States presidential election would improve gold’s outlook.

The Fed’s policy, according to ING analysts, will continue to be the primary driver of gold prices in the upcoming months, suggesting that prices may hold steady in response to investors’ expectations for a short-term rate cut.

What Path Will The Gold Price Rally Take?

As per the American investment banking giant Morgan Stanley, gold prices may go up to USD 2,300 per ounce in 2024, but price action will likely be choppy as uncertainties remain over US economic data and the Federal Reserve’s monetary policy actions.

“However, if the 10-year real yields come down further, there is a scope for gold to move higher from the current level. The yellow metal also tends to rise after the first Fed rate cut, while elevated geopolitical and political risk in 2024 should also provide support. The World Gold Council observed that elevated geopolitical risk tends to weigh on recycling volumes, according to the research firm,” reported NDTV Profit on the matter.

“The Comex Gold positioning has jumped back to 190,000 lots long, but it is well below peaks of 300,000 lots long, it said in a March 15 note,” it stated further.

The investment bank also saw a 2012 similarity on the gold price front, as it noted, “the past few years have seen gold re-price relative to real yields driven by a step change in central bank buying, more than offsetting exchange-traded-fund outflows.”

In 2012, gold prices were similar to 2024 in real terms, driven by central bank buying, and strong demand from China and India, Morgan Stanley cited further. Gold was also supported in 2012 by negative real yields, not the case this time, the investment bank said, while adding, “Our strategists see real yields continuing to fall, forecasting 10y at 1.55% by Q4, or around another 50 basis points decline, which could allow for further gold price appreciation.”

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