Why Gold Prices Are Hitting Records | Mint

Why Gold Prices Are Hitting Records

Why Gold Prices Are Hitting Records
Why Gold Prices Are Hitting Records


Among several factors, bets on the Federal Reserve cutting rates early are helping drive the increases.

The prospect that interest rates might have peaked is powering gold prices to record highs.

Futures for delivery of gold in December settled at $2,071 a troy ounce Friday, topping their previous high of $2051.50 an ounce hit in August 2020. Gold has advanced for seven of the past eight weeks, bringing its gain this year to 11%. That puts futures on track for their best annual performance since 2020, when Covid-19 crashed the economy and lifted the precious metal 24%. Futures fell 2.3% to $2024.10 on Monday.

The record is being watched closely on Wall Street, where gold stands at the intersection of several market crosscurrents at a particularly puzzling time. People often buy the precious metal as protection against inflation, but inflation is falling. Gold attracts investors seeking to hide out from economic downturns, but the economy remains strong, and expectations it will slow just moderately—while contentious—have helped fuel stock gains.

Many cite the potential for rate cuts from the Federal Reserve as a factor behind gold’s current climb. Expectations that rates will come down sparked rallies in stocks and bonds in recent weeks, with investors betting that cooling inflation means the Fed will cut with or without a recession. Bond yields have dropped sharply, including on an inflation-adjusted basis.

Investors often turn to gold instead of bonds when inflation-adjusted yields—known as real yields—decline. That reduces the benefit of bonds’ regular payments compared with gold, which pays no income. It also marks a switch from recent years, when rising real yields weighed on gold prices, disappointing those who had touted the metal’s potential as protection against the spike in inflation. The fall in yields has also dragged down the dollar, making gold cheaper for investors outside the U.S.

Investors tend to buy gold when they are nervous. Futures first crossed $2,000 during gold’s pandemic run, jumped after Russia invaded Ukraine in 2022 and leapt again when Silicon Valley Bank collapsed in March. Gold gained more than 5% in the week after Hamas attacked Israel on Oct. 7.

But investors said more prosaic worries abound, including fears that the rally in stocks and bonds has carried their prices too high, especially if the economy lands in a recession.

“Gold has become a proxy for Fed rate-cut expectations and general unhappiness," said Nicky Shiels, metals strategist at MKS PAMP.

The recent run-up has boosted shares of miners. The VanEck Gold Miners exchange-traded fund, which holds stakes in diggers such as Newmont, Barrick Gold and Agnico Eagle Mines, saw a surge of inflows in November and rose 12% over the month, compared with an 8.9% gain for the S&P 500 index.

Investors, however, are divided about gold itself, said Suki Cooper, precious-metals analyst at Standard Chartered. Individuals are buying gold coins at a brisk pace, which she interprets as concern about geopolitical risk. Meanwhile, ETFs such as SPDR Gold Shares that hold the physical metal have seen outflows this year, which Cooper chalks up to professional money managers forgoing gold for higher-yielding assets.

Such signs that many speculators are on the sidelines and might still buy into the rally buoy traders who already own gold such as Stephen Klein, chief operating officer and co-portfolio manager at hedge fund AFBI.

“It’s super underinvested, and everybody hates it," Klein said of gold. “I love the fact that positioning’s not there."

Another factor powering 2020 prices’ recent climb is a recent rush to gold by many of the world’s central banks. They were largely net sellers of gold for decades after 1971, when then-President Richard Nixon cut the link between gold and the U.S. dollar. But central banks became buyers after the 2008 global financial crisis, seeking to diversify their holdings, said Krishan Gopaul, a senior analyst at the World Gold Council.

Led by those of China, Poland and Singapore, central banks this year are on pace to surpass their record gold purchases of 2022, when the roughly 1,100 metric tons they acquired made up nearly 30% of the world’s mining production. Central-bank buying was a key reason gold’s value held fast last year, despite the rapid climb in rates, said Aakash Doshi, Citigroup’s head of commodities research, Americas.

“The structural price floor for gold is higher," said Doshi, “and central banks are a big part of that story."

Some factors could still work against gold. A bond selloff could generate a reversal in real yields. Prices this high are also likely to slow buying of physical gold—by central banks, but also in China and India, the two largest buyers of bars, coins and jewelry, said James Steel, chief precious-metals analyst at HSBC.

Steel added that recycling rates have jumped in places like India when prices reached $1,900 an ounce, with more consumers looking to cash in on the high gold prices. “If you effectively do not have retail consumers supporting then you really only have investors to keep supporting the market," he said.

Still, Wall Street’s analysts are broadly bullish about gold’s medium-term prospects. J.P. Morgan forecasts a series of Fed rate cuts between the second half of 2024 and the first half of 2025 will lift prices to $2,300.

Traders for now are focused on next week’s Fed meeting. Independent metals trader Tai Wong, a 30-year markets veteran, is holding off on adding to his core long gold position because he thinks the central bank is likely to signal a slower pace of rate cuts than the market expects.

“I do think the market is getting ahead of itself," Wong said, “This Fed meeting will be very important to reset expectations."

Write to Bob Henderson at bob.henderson@wsj.com and Yusuf Khan at yusuf.khan@wsj.com

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