Gold hits fresh record as rate cut hopes build after data shows inflation ease

By Barbara Kollmeyer

Gold prices shot to a fresh record on Monday, as investors continued to bank on U.S. interest rate cuts after data showed a key inflation gauge cooling.

Gold futures (GC00) (GCM24) rose just over $40, or 1.7%, to $2,278.30 an ounce. Gold settled at $2,238.40 an ounce on Comex Thursday, the highest finish on record, and the latest in a recent run. Prices ended March 8.9% higher and up 8% for the quarter.

The metal's "unprecedented rally" has been driver by softer-than-expected U.S. inflation data, that have boosted expectations the Federal Reserve could start cutting interest rates as soon as June, Sergio Avila, senior market analyst at IG, told clients in a note.

Data released Friday, while markets were closed for the Easter break, showed that February's core deflator, the Fed's preferred inflation gauge, eased to 0.3% on the month from 0.5% in January.

"This data, in line with consensus expectations, provides additional evidence of controlled inflation, which reinforces the Federal Reserve's stance of maintaining a prudent monetary policy," said Avila. "Federal Reserve Chair Jerome Powell has reiterated on multiple occasions that the central bank is in no rush to cut interest rates and that the latest PCE inflation data is in line with the Fed's expectations."

In an interview on Friday, Powell said the February personal-consumption expenditures data was "pretty much in line with expectations," and that he didn't see elevated inflation risks.

Avila he said markets now see a nearly 70% chance of June rate cuts, and 75 basis cuts in total this year. "Lower interest rates offer a favorable environment for gold as they reduce the opportunity cost of holding bullion, increasing its attractiveness as an investment asset," he adds.

Also: Record gold price flashes warning for Fed's rate-cut hopes

"Gold investors are currently operating under the belief that the Federal Reserve will opt to cut interest rates, regardless of whether inflation reaches its target or not," added Stephen Innes, managing partner at SPI Asset Management, in a note to clients.

"This sentiment is curious given the resilience of the dollar, which may be attributed to its status as the 'cleanest shirt in the dirty laundry basket,' amid global economic uncertainties," he said.

Also driving up gold demand is the fact that emerging market central banks have been boosting their holdings, he said.

And gold's ascent comes even as the dollar DXY and Treasury yields remain high, which wouldn't normally be an expected scenario, said Innes. "However, a confluence of factors, including geopolitical risks such as the ongoing conflict in Ukraine and the U.S. political landscape with [former President Donald] Trump's continued popularity, has contributed to this unexpected scenario."

Read: It may be silver's turn to shine after the gold rush to record high prices

-Barbara Kollmeyer

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04-01-24 0427ET

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