- Gold prices rallied since Friday due to rate cut optimism.
- Gold has had the best year since 2020 as investors cheered a looming Fed pivot.
- US consumer confidence jumped to a 6-month high in August.
Gold prices ended flat on Tuesday and fell on Wednesday as the dollar rose ahead of more US inflation data. The US will release its core PCE report on Friday, giving guidance on the size of upcoming Fed rate cuts.
Gold prices rallied on Friday and Monday due to rate cut optimism. Notably, Powell opened the door to a rate cut in September, stating the time to adjust policy was here. His statement followed data showing cooler-than-expected inflation and a rapid decline in the labor market.
The Fed has always tried to balance growth and inflation. High interest rates lower inflation but also hurt growth. Therefore, policymakers have remained alert to any signs of economic weakness.
The labor market has remained resilient through most of the Fed’s rate-hiking cycle, giving the central bank enough room to hike rates and keep them high. However, that has changed. Cracks in the labor market have pressured the Fed to lower borrowing costs and spur growth.
Therefore, investors are fully pricing a rate cut in September. However, they are betting between 50 bps and 25 bps. The likelihood of a more significant cut is 36.5%. Meanwhile, the probability of the smaller one is 63.5%. The Fed will decide the size depending on upcoming data. This week, the US will release GDP and PCE inflation reports. These will show the state of growth and inflation.
Gold has had its best year since 2020 as investors cheered a looming Fed pivot. Lower interest rates are bullish for the yellow metal as they reduce the opportunity cost of holding it. Meanwhile, US Treasury yields drop as interest rates reduce.
US consumer confidence (Source: Conference Board)
Elsewhere, data on Tuesday revealed that US consumer confidence jumped to a 6-month high in August. However, concerns about the labor market also rose, putting more pressure on the Fed.
Separate data showed that China’s gold imports through Hong Kong rose by 17% in July, showing a surge in demand. China is the largest consumer of gold, so an increase in demand is bullish for global prices.
Further support for gold this week has come from concerns about an escalation in the Middle East war. The conflict between Israel and Hezbollah intensified over the weekend, increasing the demand for safe-haven gold.
