Gold soars to unprecedented heights amid geopolitical tensions

As the second quarter of the year commences, gold has reached unprecedented heights, thanks to geopolitical tensions and the Federal Reserve’s impending rate cuts.

The precious metal’s price soared to as high as US$2,259.69 per ounce, marking an increase of 1.3% from its value at the end of last week.

The Federal Reserve’s preferred measure of core inflation, the core personal consumption expenditures index, experienced a slowdown in February, according to data released last Friday. This information further strengthens the argument for a decrease in borrowing costs, despite the US central bank’s cautious approach.

A variety of factors have propelled the price of gold by approximately 14% since mid-February. These include the potential for major central banks to relax monetary policy, heightened tensions in the Middle East and Ukraine, and robust purchases by central banks, predominantly in China. Chinese consumers have also been stocking up on gold due to ongoing challenges in Asia’s largest economy.

Following the release of the inflation data, Federal Reserve Chair Jerome Powell stated that the figures were “pretty much in line with our expectations,” and that there was no urgency to cut rates. However, investors are expected to reassess the US economy and central bank policy later this week, with monthly payrolls projected to increase by at least 200,000 for the fourth consecutive month.

The swaps markets currently predict a 61% likelihood of a Fed cut in June, an increase from 57% last week. Lower rates are generally favourable for gold, as it does not yield interest.

Rates cut

Warren Patterson, head of commodities strategy at ING Groep NV, stated he was happy with the predictions.

“Inflation data, and Powell’s comments in particular, have provided a further boost to gold, with the market becoming increasingly convinced that the Fed will start to cut rates in June.”

Patterson added that a stronger-than-expected US jobs report could potentially trigger a short-term pullback.

Chinese demand for gold has been particularly noticeable in recent quarters. The central bank of the country has substantially enhanced its gold reserves over the past 16 months. Furthermore, the younger Chinese population has shown an increasing interest in buying gold.

Numerous esteemed banks have endorsed the positive outlook for the metal. JPMorgan Chase & Co., identified gold as its top commodity market pick last month and predicted that its price could hit US$2,500 per ounce within the year. Goldman Sachs Group Inc., also foresees the potential for gold to reach US$2,300 per ounce, citing the advantages of a lower interest-rate environment, reported Bangkok Post.

Despite this, gold’s rise has not resonated with investors who prefer exposure to the metal through exchange-traded funds (ETFs). Global holdings in bullion-backed ETFs decreased by over 100 tonnes in the first quarter, reaching their lowest point since 2019 in mid-March, before experiencing a minor recovery, as per Bloomberg’s tally.