- Risk appetite dropped after reports of an escalation in the war between Russia and Ukraine.
- Israel had used airstrikes on Qatar to try to kill Hamas leaders.
- Central banks bought more gold for their reserves and dumped the dollar in August.
Gold prices soared to record highs on Tuesday as geopolitical tensions sent investors scrambling for safety. A slowdown in the US economy fueled expectations of a dovish Fed, adding support to prices. Meanwhile, market participants are eagerly anticipating US consumer inflation prices for more clues on Fed rate cuts.
Tuesday was a good day for gold as it soared due to its safe-haven status. Risk appetite dropped after reports of an escalation in the war between Russia and Ukraine. Russia attacked Ukraine with drones that went past its border and were shot down in Poland. The event raised concerns about an escalation of the war to include neighbouring countries.
Elsewhere, there were reports that Israel had used airstrikes on Qatar to try to kill Hamas leaders. The move could worsen tensions between the two groups and escalate their conflict. All this geopolitical strife dented risk appetite, allowing gold prices to climb to all-time highs.
Spot gold price (Bloomberg)
Furthermore, gold has had a bullish run since Friday last week, when data revealed weakness in the US labor market. The economy added only 22,000 jobs in August, well below the estimate of 75,000. Meanwhile, the unemployment rate increased to 4.3%. The data highlighted a worrying slowdown in the US labor market, solidifying bets for a September Fed rate cut.
Gold does well when interest rates drop because it is a non-yielding asset. Experts are now forecasting three US rate cuts before the end of the year. At the same time, the dovish outlook has weighed on the dollar, making gold cheaper for foreign buyers.
“Supportive for gold is the bearish dollar outlook underpinned by expectations of Fed cuts, investors distancing from US assets and tariff-related economic uncertainty,” said Ricardo Evangelista, senior analyst at ActivTrades.
Experts also believe the decline in the dollar’s safe-haven status has boosted gold. The World Gold Council reported that central banks bought more gold for their reserves and dumped the dollar in August.
Meanwhile, market participants are anticipating the US CPI report for more clues on Fed rate cuts. Economists believe inflation will accelerate from 2.6% to 2.9%. A softer number would support rate cut bets, further boosting gold. On the other hand, a hot figure would likely dampen rate cut expectations.
