Favored Fed inflation gauge drives gold higher

(Bloomberg) — Gold prices rose to a record high as the second quarter began, extending a rally driven by the Federal Reserve’s impending rate cut and rising geopolitical tensions.

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After hitting a series of highs in recent sessions, gold jumped to $2,259.69 an ounce in early trade on Monday, up 1.3% from Thursday’s close.

Data on Friday showed that the core personal consumption expenditures index, the Fed’s preferred gauge of underlying inflation, cooled in February, when many markets were closed. That adds to the case for lower borrowing costs, even as the Fed has been striking a cautious tone.

A series of positive factors have pushed gold prices up about 14% since mid-February. The prospect of monetary easing from major central banks and escalating tensions in the Middle East and Ukraine supported gold prices. Strong central bank buying also drove gold prices higher. Banks, especially those in China, while consumers have been buying gold in large quantities due to ongoing problems in Asia’s largest economy.

After the inflation data were released, Federal Reserve Chairman Powell said that the data were “generally consistent with our expectations” and that there was no rush to cut interest rates. Later this week, investors will have a further opportunity to assess the outlook for inflation. The U.S. economy and central bank policy expect monthly employment to increase by at least 200,000 for the fourth consecutive month.

The swaps market puts the probability of a rate cut by the Federal Reserve in June at 61%, up from 57% on Thursday. Lower interest rates are generally good for gold because gold doesn’t pay interest.

Warren Patterson, head of commodity strategy at ING Groep NV, said, “Inflation data, especially Powell’s comments, further boosted gold prices, and the market is increasingly convinced that the Federal Reserve will start to cut interest rates in June.” He said that there will be no short-term interest rates. It would take too many catalysts to see the economy pull back, and that could be a stronger-than-expected U.S. jobs report.

China demand

Spot gold was up 1.2% at $2,257.61 an ounce as of 11:14 a.m. in Singapore, having risen 3% last week. Its 14-day relative strength index is near 79, above the 70 level, which suggests to some investors that gold prices may have risen too far. The Bloomberg Dollar Spot Index fell 0.1%, while silver, platinum and palladium were all higher.

China’s demand for gold has been evident in recent quarters. China’s central bank has added to its massive gold reserves, increasing its gold holdings each of the past 16 months. In addition, buying gold is becoming increasingly popular among young people in China.

Read more: Chinese New Year buyers favor gold as stocks, real estate collapse

The metal’s positive outlook has been endorsed by several major banks, with JPMorgan last month saying the metal was its No. 1 pick for commodity markets and could reach $2,500 an ounce this year. Sachs Group Inc. said it expects gold prices to rise to $2,300 an ounce, highlighting the benefits of a lower interest rate environment.

Still, gold’s rally has yet to resonate with investors who tend to invest in gold through exchange-traded funds. Global gold-backed ETF holdings fell by more than 100 tons in the first quarter, reaching their lowest level since mid-2019. – There was a slight rise in March, according to Bloomberg.

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