Record Gold Price Surges to $2,300 Following Federal Reserve’s Hints of Interest-Rate Reductions
Gold prices hit a record high on Thursday, reaching above $2,300 per ounce, after U.S. Federal Reserve Chair Jerome Powell suggested that the agency will start cutting rates this year. This development is typically seen as bullish for the precious metal. Since March 25, gold prices have risen for seven consecutive trading days.
Powell’s comments came during a speech at the Stanford Graduate School of Business on April 3, where he indicated that there will not be any more rate hikes and that the agency would begin cutting rates this year. This was in line with expectations from many investors. The Federal Reserve has raised interest rates 11 times since March 2022, and the current rate is at a two-decade high of 5.25 percent.
The correlation between gold and interest rates is negative, meaning that declining interest rates make assets like gold more attractive to investors. According to data from the CME FedWatch Tool, over 93 percent of interest rate traders do not expect the Fed to cut rates in its upcoming meeting in May. However, more than 58 percent expect a rate reduction of 25 basis points at the June meeting.
In addition to the Federal Reserve’s hints of rate reductions, ongoing global conflicts and elevated inflation are providing long-term support for gold. When investors are concerned about high inflation, they often turn to gold as a safe haven, driving up its price.
The Kobeissi Letter, a commentary on global capital markets, noted that gold prices have officially crossed above $2,300 for the first time in history. Since February 14, gold has increased by $300 per ounce or 15 percent in less than two months. Geopolitical tensions and renewed inflation worries have been the primary drivers behind this surge. Many investors are even predicting that gold prices will exceed $3,000 as the upward trend continues.
JP Morgan is also holding a bullish view on gold for 2024. The bank’s head of Global Commodities Strategy, Natasha Kaneva, stated that their only structural bullish call is for gold and silver. Gregory Shearer, head of Base and Precious Metals Strategy at JP Morgan, believes that gold and silver will remain bullish well into the first half of 2025.
A report by Goldman Sachs in February supported the positive outlook for gold, mentioning that central bank purchases and geopolitical tensions are limiting the downside risks for gold prices. Central banks, particularly those in China and India, have been buying significant amounts of gold, offsetting the outflows from gold exchange-traded funds. These purchases have been driven by geopolitical tensions and factors such as Russia’s invasion of Ukraine and the COVID-19 pandemic.
The World Gold Council (WGC) also emphasized the role of geopolitical risk in boosting gold returns. In a January update, the WGC noted that elevated geopolitical risk added an estimated 5 percent in returns in 2023, mitigating the impact of declining inflation. The council expects gold prices to remain flat with upside potential if the U.S. economy experiences a “soft landing,” which they believe has a probability of 45-65 percent.
However, in a less probable “hard landing” scenario (25-55 percent probability), the WGC anticipates gold prices to rise notably higher and reach a new record high. If the U.S. economy enters a “no landing” scenario where inflation and economic growth reaccelerate, the WGC predicts that gold prices will face downside pressure. This scenario has the lowest probability, at just 5-10 percent.
Looking ahead to 2024, the WGC identifies major global elections in the United States, India, the European Union, and Taiwan as geopolitical risks that could increase investors’ need for portfolio hedges. The council believes that maintaining a strategic allocation to gold in portfolios would provide strong support in the event of a recession, which they consider to be a possibility.
In conclusion, the record-breaking surge in gold prices to over $2,300 per ounce was driven by the Federal Reserve’s hints of interest-rate reductions, ongoing global conflicts, and elevated inflation. These factors have made gold an attractive investment option for investors seeking a safe haven amid uncertainties. With predictions from JP Morgan and supportive reports from institutions like Goldman Sachs and the World Gold Council, the outlook for gold prices remains positive for the coming years, especially if geopolitical tensions persist and inflation concerns continue to grow.