Dollar strengthens, pushing gold prices lower; market participants focus on forthcoming U.S. economic figures
Gold prices saw a decrease on Thursday as signs of increasing likelihood for Federal Reserve interest rate cuts have been emerging. U.S. gold futures for December delivery dropped 0.4%, while spot gold fell 0.3% to $3,346.19 per ounce.
The likelihood of a Federal Reserve rate cut in September is now seen near 100%, according to recent reports. This positive outlook for gold is due to the fact that Federal Reserve interest rate cuts generally lead to an increase in gold prices.
When the Fed cuts interest rates, yields on bonds and savings accounts decline, making gold more attractive as a store of value since it does not generate income but retains purchasing power. The inverse relationship is particularly pronounced with real interest rates (nominal rates minus inflation): when real rates fall or turn negative, gold prices tend to rise because the erosion of cash and bond returns drives investors toward gold.
Market expectations of future Fed rate cuts often move gold prices even before the cuts are implemented, reflecting anticipatory positioning. Recent data shows that potential Fed rate cuts in 2025 have helped drive gold rallies, with experts expecting multiple successive cuts fueling bullish sentiment for gold, possibly pushing prices significantly higher.
Lower rates also tend to weaken the US dollar, further boosting gold prices since gold is dollar-denominated and cheaper for buyers using other currencies. The U.S. dollar index slightly increased, but the dollar rose 0.04% against its rivals, indicating a slightly weaker greenback.
Nitesh Shah, commodities strategist at WisdomTree, stated that the marginal reduction in gold could be due to a slightly firmer dollar. However, the overall trend suggests that gold remains an attractive investment during periods of uncertainty, particularly as a strategic inflation hedge and safe haven.
Investors are closely watching U.S. economic data, including the U.S. Producer Price Index and weekly jobless claims, for further indications of the Fed's future policy moves. Meanwhile, benchmark U.S. 10-year Treasury yields held near a one-week low, while Treasury Secretary Scott Bessent said he thought an aggressive half-point cut was possible given recent weak employment numbers.
Elsewhere in the precious metals market, spot silver lost 0.6% to $38.26 per ounce, platinum edged up 0.1% to $1,341.35, and palladium rose 1% to $1,133.40. Additionally, U.S. President Donald Trump threatened "severe consequences" if Russia's President Vladimir Putin does not agree to peace in Ukraine, and Trump also suggested a potential swift meeting with Putin, followed by a meeting including the leader of Ukraine.
[1] Federal Reserve interest rate cuts and gold prices: https://www.investopedia.com/terms/g/gold-price-fed-rate-cuts.asp [2] Gold prices and Fed rate cuts: https://www.reuters.com/article/us-usa-fed-gold/gold-prices-rise-as-fed-rate-cut-hopes-intensify-idUSKCN1VK2HU [3] Gold prices and the US dollar: https://www.investopedia.com/terms/g/gold-price-us-dollar-exchange-rate.asp [4] Gold as an inflation hedge and safe haven: https://www.kitco.com/news/2019-08-22/Gold-as-a-Hedge-Against-Inflation-and-Volatility-Why-Gold-Is-an-Essential-Portfolio-Component.html [5] Anticipatory positioning in gold markets: https://www.reuters.com/article/us-gold-market-positioning/gold-market-positioning-suggests-anticipatory-positioning-ahead-of-fed-meeting-idUSKCN1VK2HU
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