- The war in Gaza escalated this week as Israel struck several parts of the region.
- Gold has benefitted from a surge in Fed rate cut bets.
- Markets eagerly await the US CPI report for more clues on Fed rate cuts.
Gold prices steadied after reaching a two-week high on Tuesday due to rising geopolitical tensions and expectations for a December Fed rate cut. The rally pause came as market participants awaited the US inflation report.
The war in Gaza escalated this week as Israel struck several parts of the region, killing many people. Although there have been efforts to broker a ceasefire deal, progress is slow. Gold is considered a safe bet in times of geopolitical uncertainty. As a result, investors bought more of the yellow metal.
Meanwhile, gold has benefitted from a surge in Fed rate cut bets since Friday last week. The US released its monthly employment report, which showed a mixed picture of the economy. Job growth surged, with the economy adding 224,000 jobs in November. However, the unemployment rate jumped from 4.1% to 4.2%, indicating softness in demand for labor. As a result, traders raised the likelihood of a December Fed rate cut from 70% to 85%.
Gold does well when US interest rates are low because the non-yielding metal becomes more appealing. This anticipation of lower borrowing costs in the US has powered gold’s rally this year. However, analysts believe the trend might pause or reverse in 2025. The outlook for US inflation has shifted since Trump won the election. His policy proposals will likely increase consumer price pressures, leading to fewer Fed rate cuts.
US consumer sentiment (Source: University of Michigan)
Already, consumer expectations have shifted to reflect high inflation in the next year. At the same time, Fed policymakers are sounding less dovish about the future. If interest rates remain at restrictive levels, gold might suffer.
The recent rally in gold has also come from a wave of global rate cuts. Although the future for the Fed is less dovish, other major central banks are bringing rates down fast. These include the Bank of Canada and the European Central Bank. Both central banks will likely cut interest rates in December.
Meanwhile, markets eagerly await the US CPI report for more clues on Fed rate cuts. According to forecasts, price pressures increased by 0.3% in November, higher than the previous reading of 0.2%. Meanwhile, the annual figure might increase by 2.7%, compared to the 2.6% increase in the previous month.
