Gold hits high of USD 2,483 High as Fed Rate Cut Expectations and Geopolitical Tensions Fuel Rally

After a brief pause in June, the gold market has surged with renewed vigor. Gold prices, which started in the low USD 2,300s in early July, quickly surpassed USD 2,400 and reached a high of USD 2,483 this Wednesday, according to a Metals Focus report.

This recent rise in gold prices is largely attributed to expectations of a US Federal Reserve interest rate cut. The anticipation stems from an unexpected drop in US consumer prices last month and emerging signs of a slowing job market. These factors suggest that the disinflationary trend is resuming, potentially bringing the Fed closer to implementing rate cuts.

Lower interest rates typically reduce the opportunity cost of holding non-yielding assets like gold, thereby increasing its attractiveness. Additionally, the US dollar has fallen to a three-month low, making gold more affordable for international investors and further boosting demand.

Geopolitical factors have also contributed to the rise in gold prices. Recent concerns over political instability, including the attempted assassination of former President Donald Trump and the possibility of his return to the presidency, have heightened gold’s appeal as a safe-haven asset.

The broader fiscal and economic context supports gold’s strong performance. Increased scrutiny of the US federal debt and concerns over the ballooning fiscal deficit have intensified fears about sustainability. Speculation that Trump’s tax-cutting and pro-trade tariff policies could worsen the deficit and inflation has further driven gold investment.

In Europe, political uncertainty following France’s snap election has added to the global investment climate’s complexity, enhancing gold’s attractiveness. Professional investors remain notably bullish, with aggressive buying during price corrections raising the floor for gold prices. Despite reaching new highs, investors holding long positions have been hesitant to liquidate.

On CME futures, profit-taking has been limited, and short positions on gold remain subdued. Managed money positions are near four-year highs, reflecting continued confidence in gold’s potential. Gold Exchange-Traded Products (ETPs), which had seen consecutive outflows for 12 months, have recently experienced a turnaround with net inflows starting in May. This recovery is largely driven by inflows into European-listed products.

The official sector continues to be a major gold buyer, though reported purchases have moderated from the exceptionally high levels of 2022-23. Countries like Turkey and Poland are maintaining steady accumulation strategies, underscoring gold’s role in reserve portfolio diversification amidst ongoing geopolitical uncertainties and mounting US debt.

Looking ahead, the factors driving gold’s current performance are expected to persist through the rest of 2024 and into 2025. Anticipated Fed rate cuts, along with persistent global uncertainties such as conflicts in the Middle East and Ukraine, and escalating trade tensions with China, are likely to support gold prices. While a near-term pullback might occur as tactical players take profits or respond to equity market liquidations, downside risk should be limited.

(With ANI Inputs)

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