Gold prices surged over 1% on Friday, buoyed by comments from Federal Reserve Chair Jerome Powell that signaled the central bank is likely to cut interest rates in September. The precious metal, which often benefits from lower interest rates, saw its spot price rise to $2,512.63 per ounce, edging closer to the record high of $2,531.60 reached earlier in the week. U.S. gold futures also climbed, settling at $2,546.30.
Powell's remarks, delivered during the Federal Reserve's annual retreat in Jackson Hole, Wyoming, suggested that the time for a policy shift has arrived as inflation nears the Fed's 2% target. "The time has come for policy to adjust," Powell said, noting that the Fed's focus will now include ensuring the U.S. economy maintains full employment while continuing to monitor inflation.
The market reacted swiftly to Powell's speech, with the dollar index dropping 0.8% against a basket of currencies, and U.S. Treasury yields also declining. The dip in the dollar and yields made gold more attractive to investors holding other currencies, further boosting demand for the metal. Tai Wong, an independent metals trader based in New York, observed, "Gold will continue to grind higher ahead of the September Fed meeting and the updated dot plot, which will indicate how many likely cuts this year."
Investors are now betting heavily on a rate cut next month, with market expectations showing a 59.5% chance of a 25-basis-point reduction and a 40.5% chance of a deeper 50-basis-point cut. Lower U.S. interest rates typically increase the appeal of gold, which, unlike bonds, does not yield interest. Bart Melek, head of commodity strategies at TD Securities, noted that while some profit-taking might occur, the long-term outlook for gold remains strong as the Fed moves to protect the labor market without worrying about inflation.
The anticipation of rate cuts has also bolstered other precious metals. Silver prices jumped 2.9% to $29.83 per ounce, with further support coming from rising demand in sectors like solar panel production and electronics manufacturing. Meanwhile, platinum gained 1.8% to $961.01, and palladium rose 2.6% to $956.69.
Powell's acknowledgment of the need for rate cuts comes as inflation has steadily declined from its peak above 7% in June 2022 to 2.5%, closer to the Fed's target. However, the U.S. labor market has also softened, with the unemployment rate inching up to 4.3%. Despite this, Powell expressed confidence that the economy can achieve a so-called soft landing-bringing inflation under control without triggering a sharp rise in unemployment.
"The time has come for policy to adjust," Powell reiterated, emphasizing that the direction of monetary policy will now depend on incoming data and the evolving economic outlook. The speech solidified market expectations that the Fed is prepared to begin easing, with traders holding steady in their bets for total rate cuts expected by the end of the year.
Bart Melek of TD Securities commented on the implications of Powell's speech, stating that it confirmed what gold traders had been anticipating-rates are poised to come down, with potential for even more aggressive cuts if economic conditions warrant. TD Securities now expects gold prices to continue their upward trajectory, potentially reaching over $2,700 in the coming quarters.
