Gold Price Reaches New Heights as Fed Hints At Interest Cuts Later This Year

The price of gold has hit a fresh all-time high amid comments by Federal Reserve Chair Jerome Powell that interest rate cuts will arrive after inflation is under control.

At the time of writing, an ounce of gold was trading at $2,285 on the spot market after dropping by 0.55%. The current price is a slight drop from the record high of above $2,300 that the commodity achieved earlier this week.

BREAKING: Gold price surge over $2300 an ounce, a new record high. pic.twitter.com/9sjL3wAAr7

- Radar (@RadarHits) April 4, 2024

Precious metals benefit from a diverse range of factors that help drive prices, the main one being optimism that the Fed will trim interest rates this year.

Fed Optimism on Rate Cuts Leads to Strong Gold Prices

On Wednesday, officials at the US Federal Reserve, including Chair Jerome Powell, said there was a need for more discussions and economic data before a decision is made to trim interest rates.

Financial markets anticipate that the Fed will start trimming rates in June. This move will be a major reversal after the institution aggressively increased rates to tame inflation levels that had surged to a 40-year high.

According to the CME Fed WatchTool, there is a 59% chance that the Fed will lower interest rates in June. The precious metal tends to gain when interest rates are low, which explains the recent growing demand.

US non-farm payrolls will be released on Friday, and they could shed more light on the economic situation and the direction that the Fed will take during the next Federal Open Market Committee (FOMC) meeting.

With the US Federal Reserve trimming interest rates, other central banks are expected to follow suit. As anticipation for these rate cuts builds and the process is underway, the consequence will be a stronger gold price.

Geopolitical Tensions Are Also Helping Drive Gold's Price

Another factor that is also driving the price is geopolitical tensions in Asia and Europe. The Russia-Ukraine war is not showing signs of ending, with the recent terrorist attack at a Moscow concert escalating tensions.

On the other hand, there is also a growing risk of the war between Israel and Hamas extending to involve Iran. A widespread conflict in the Middle East will push people towards holding their wealth in a haven such as gold.

Iran has vowed to retaliate against an attack launched by Israel on its embassy in Damascus. The attack killed two Iranian generals and five military advisers. As the tension builds, investors are flocking to gold, with the demand for this precious metal being seen in the price increase.

With no end in sight for the Middle East and Russia-Ukraine conflict, gold could continue surging in the short term, driving prices higher.

Weakening US Dollar Drives Gold Prices

Dollar-denominated assets tend to gain whenever the USD weakens and drops toward low levels. The US Dollar Index, which tracks the performance of the US dollar against six major currencies, extended its losses to 104.

The dollar weakened after the US Institute for Supply Management (ISM) submitted a weak services PMI report for March.

The ISM Services PMI in the US fell to 51.4 in March 2024 from 52.6 in February and below forecasts of 52.7. The reading pointed to the weakest growth in the services sector in three months, amid a slower rise in new orders. -Institute for Supply Management

- Las Finanzas (@lasfinanzas) April 3, 2024

On the other hand, the 10-year US Treasury Yields briefly climbed to 4.42% on Wednesday amid anticipation of the Fed ending its hawkish policy. While demand for non-yielding assets like gold tends to drop when demand for interest-bearing assets is high, this has not been the case this time around.

As all of these factors come into play, gold will likely continue exhibiting strong performance.

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