Gold price swings dramatically after surging to record
Gold retreated from its record high amid signs that traders’ aggressive pricing of US Federal Reserve rate cuts may have gone too far.
Bullion fell as much as 2.5 per cent on Monday (Tuesday AEDT) in New York trading after leaping more than 3 per cent in Asia where it hit a record high of $US2135.39 an ounce, surpassing the previous all-time peak set in August 2020.
The precious metal edged higher on Tuesday to trade near $US2,040 an ounce in Asian trading.
Gold has risen more than 600 per cent since the turn of the millennium. Bloomberg
The latest rally in gold has been turbocharged by Friday comments from Federal Reserve chairman Jerome Powell that traders interpreted as setting the stage for a pivot toward rate cuts, spurring a plunge in the US dollar and Treasury yields on Monday.
Those bets are now being seen by the market as overdone, with Goldman Sachs calling the level of easing priced in by financial markets “excessive”.
“It’s probably premature to say the Fed is pivoting and that we’ll have a continuous decline along the yield curve,” said Bart Melek, global head of commodity strategy at TD Securities. “Given all the economic data, it’s not all certain that the Fed is ready to pull the trigger and lower rates just yet.”
The yellow metal typically has an inverse relationship with bond yields, falling as rising interest rates offer a more appealing alternative to gold, which pays no interest, and rising as they fall.
Investors will be on the lookout for a slew of key jobs readings over the next few days for clues on the Fed’s next steps.
But the precious metal’s strength has also been underpinned by a wider array of factors, from a wave of purchases by governments and central banks to geopolitical uncertainty, with 41 per cent of the world’s population set to go to the polls next year.
Gold “is the answer for many things at the moment – whether it’s inflation carrying on, rate cuts or the uncertainty with very costly wars going on”, said Jo Harmendjian, portfolio manager at Tiberius Group.
It has gained more than 10 per cent since early October, as Treasury yields and the dollar have fallen amid growing expectations for US rate cuts. Swaps markets now see a more than 50 per cent chance of monetary easing in March and are pricing in a rate cut in May.
Still, many investors have remained on the sidelines as gold has surged higher, raising the possibility of further rallies as latecomers look to buy.
Investors in gold via exchange-traded funds, a key driver of previous bull markets in the metal, have been sellers for much of this year, with holdings down by more than a fifth from a high in 2020.
The gold-backed ETFs experienced five straight sessions of selling last week even as hedge funds and money managers boosted their bullish bets to a six-month high.
“Market positioning is light versus previous times that prices tested these levels,” UBS strategists Wayne Gordon and Giovanni Staunovo said in a note. “To see even higher prices from this high base, investment demand needs to increase in the form of greater ETF purchases.“
Bloomberg
Bloomberg
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