Gold prices reached a record of $2,353 per ounce on Monday morning before sliding back to about $2,336 as heightened geopolitical tensions, central bank buying and looming interest rates cuts fuelled demand for bullion.
The precious metal has been on a largely uninterrupted rise since mid-February, when it cost about $2,000 an ounce, as traders considered the possibility that interest rates would soon start to fall, with interest rate swaps implying market expectations of about two rate cuts by the Federal Reserve this year.
It was the seventh consecutive trading session in which the metal had been sold for a record price.
Expectations of American interest rate cuts — the key upward driver of gold prices — have eased over the past week as the United States economy has remained surprisingly resilient, with the latest jobs report on Friday showing that it had added 303,000 roles in March, well above expectations of 205,000.
It prompted traders to dampen their expectations of rate falls, with market pricing implying that traders now see about a 48 per cent chance of a cut in June, down from 59 per cent a week ago, and favour two cuts this year instead of three.
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High real US rates are typically a headwind for gold, making the non-yielding metal comparatively unattractive to investing in US treasury bonds, but there are other factors driving up gold prices.
Rising demand from central banks has also boosted demand for bullion. China’s bank purchased gold for its reserves for the 17th month in a row in March, according to official data published on Sunday. Overall, China held 72.74 million fine troy ounces of gold at the end of March, compared with 72.58 million ounces at the end of February.
Central bank buying has been an important driver of gold prices over the past year, with demand from the lenders of last resort reaching 1,037 tonnes last year, according to the World Gold Council, a trade association, the second-highest on record.
The high levels of geopolitical risk, in the Middle East and Ukraine, have also pushed up prices for gold and other precious metals as investors seek a hedge against uncertainty and a haven from dollar-based assets vulnerable to American sanctions.
Analysts at UBS bank said that the rally had so far been driven by buyers who had not traditionally made material purchases, while those buying through exchange-traded funds (ETF) had remained net sellers, with ETF holdings at a four-year low.
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The strong demand for gold, which has surpassed UBS’s bullish expectations, led analysts at the bank to raise its year-end target for the price to $2,500 per ounce on the basis that once the Fed does start cutting rates it will prompt a step-up in demand from ETFs.
There was the caveat that strong US economic data could delay potential cuts, but so far these setbacks have been “shallower” than the bank had expected.
Prices for silver rose by 1.1 per cent to $27.77 per ounce, hovering around its highest price since June 2021, and prices for platinum and palladium also rose.
The extraordinary rally in the price of gold might seem at odds with comments from Jerome Powell, chairman of the Federal Reserve, last week. The American central bank was “not yet done” in its fight against inflation, he said in a speech at Stanford University business school.
Falling interest rates are seen as a boon for gold, which offers no yield to investors. When real rates — interest rates adjusted for inflation — are higher, the relative attraction of the precious metal is diminished when a higher return is on offer from government bonds.
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Recent US economic indicators have prompted traders to pare back their expectations around the pace of interest rate cuts. Inflation, at 3.2 per cent, remains above the central bank’s target of 2 per cent and official measures of payrolls in the US economy have beaten forecasts to expand by 303,000 in March.
The market is now pricing in about a 48 per cent chance of an interest rate cut in June, down from 59 per cent a week ago, and now favours two cuts this year rather than three.
Yet investors may also look to gold as a hedge against inflation, should the measure stay higher than expected, given the metal is perceived to hold its value while other assets falter.
There is more driving the gold rally than expectations of interest rate cuts, which could provide fuel for the commodity to hold its gains. Central banks have been adding to their gold reserves, not only as a hedge against inflation, but also to reduce their reliance on the dollar as a reserve currency. China has led the buying, adding to its gold reserves for a 17th consecutive month in March, according to official data.
Continuing geopolitical turbulence has provided another boost to the price of gold, which is seen as a safe haven asset. The metal could continue its ascent if political and economic uncertainty remains heightened.
