On December 4, during the Asian trading session, international gold prices soared, with gold futures briefly surpassing the historic high of $2,150 per ounce. Spot gold prices also reached new heights, momentarily exceeding $2,100 per ounce.
However, as the U.S. stock market opened on Monday, gold prices fell from their record highs amid a rebound in the U.S. dollar and Treasury yields. Gold futures dropped to $2,042 per ounce, and spot prices to $2,028 per ounce.
Since October, international gold prices have seen an overall increase of over 10%. Analysts attribute this rise to expectations of a Federal Reserve rate cut next year, a weakening dollar, and heightened geopolitical uncertainties, which have all contributed to the surge in gold prices. Additionally, global central banks' acquisition of 800 tons of gold in the first three quarters of the year further fueled the price increase.
Daria Efanova, Director of Financial Research at Sukhtown, noted in a client advisory on Monday that market expectations of the Federal Reserve ending its rate hikes have created a more favorable investment environment for gold, a non-yielding asset.
Gold prices typically have an inverse relationship with U.S. Treasury yields. When the Federal Reserve raises interest rates, Treasury yields increase, attracting more investors to U.S. bonds and causing gold prices, which do not generate yield, to fall. Conversely, when the Fed cuts rates or prepares to do so, leading to a decline in Treasury yields, gold becomes more attractive to investors.
Market expectations for a Fed rate cut have been bolstered by recent statements from Fed officials. Christopher Waller, one of the Fed's most hawkish members, suggested in late November that current policies are effectively slowing economic growth and bringing inflation back to the 2% target. Waller's remarks were interpreted as hinting at no further rate hikes.
Last Friday, Fed Chair Jerome Powell reiterated the Fed's commitment to reducing inflation to 2%, stating that it's too early to conclude that "we have taken a sufficiently restrictive stance or to speculate on when policy might be eased." Powell indicated readiness for further tightening if appropriate.
However, U.S. Treasury yields rose on Monday, with the 10-year yield reaching 4.256%, an increase of 5.3 basis points. This yield is significantly lower than the historic high in October when it surpassed 5%. Yet, Monday's fluctuation also shows market division over interpreting Powell's stance.
Similarly, the U.S. Dollar Index, which measures the dollar against six major currencies, rose by 0.43% on Monday, closing at 103.712 in the currency market.
Last month, the Dollar Index fell nearly 3% due to market bets on the end of the Fed's rate hike cycle. A weaker dollar further boosted gold's appeal.
While many analysts believe gold prices will continue to rise, some caution against potential volatility. Marcus Garvey, Head of Commodities Strategy at Macquarie Group, warned that gold might be running too fast and needs broader market participation to maintain high prices.
Regarding the Fed's actions next year, a Barclays report released on Monday suggested the market might be too pessimistic about the U.S. economic outlook. The institution predicts the U.S. economy will remain resilient next year, prompting the Fed to be cautious about rate cuts. Barclays forecasts four rate cuts by the Fed next year, totaling 100 basis points.
ING predicts six rate cuts totaling 150 basis points, while UBS anticipates a mild recession in the U.S. by mid-next year, with the Fed cutting rates by a total of 275 basis points, far exceeding market expectations.
