Signs indicate that the Federal Reserve will lower interest rates from the highest point in 23 years at the next meeting, while gold prices hit a new high.
Gold prices have risen by over 20% so far this year. With expectations that interest rates may eventually decrease, on Wednesday (August 14), spot gold prices surged past $2,500 per ounce. On Friday, spot gold prices rose by 1.8% as U.S. housing starts slowed to the lowest level since the early stages of the pandemic, giving investors reason to bet on a rate cut.
Since gold does not provide yield, traders believe that when central banks cut rates, gold becomes a better investment.
On Friday, the U.S. Commerce Department reported that the July housing starts dropped to the lowest level since 2020, intensifying concerns over economic strength, especially following recent soft inflation and labor data.
Meanwhile, a policy maker at the Federal Reserve stated that there are no signs of overheating in the U.S. economy, indicating that the Fed will lower borrowing costs at the next meeting in September.
Autan Goolsbee, President of the Federal Reserve Bank of Chicago, told National Public Radio, “You don’t want to tighten policy anymore.”
“The reason you tighten policy is because you’re worried the economy is overheating, and it doesn’t look like that’s the case,” he said.
Last month, JPMorgan predicted that a Fed rate cut would continue to boost gold prices and projected that gold prices could hit the $2,500 mark in the fourth quarter of this year.
Bloomberg reported that Bart Melek, Global Head of Commodity Strategy at TD Securities, said that gold investors “tend to think that the Fed will take more aggressive measures in terms of monetary easing.” He mentioned that with “macro/currency and central bank policies aligning”, gold prices could further rise to $2,700 in the coming quarters.
According to “Business Insider”, Alex Kuptsikevich, Senior Market Analyst at FxPro, predicted that gold might eventually trade between $2,800 and $2,900. On Friday, he wrote that this prediction is based on gold’s movement from its low in October 2022 to September 2023.
In addition, Trade Nation’s Senior Market Analyst warned that profit-taking could occur, bringing gold trading prices down to around $2,450.
While the prospect of falling interest rates has been a key factor driving the rise in gold prices, escalating geopolitical risks, including tensions in the Middle East and the conflict between Russia and Ukraine, have led to increased demand for gold as a safe haven asset, fueling the gold bull market.
As gold rises, global stock markets are poised to have their best week this year, with signs indicating that the U.S. economy may not be heading into a recession.
The MSCI global stock index surged nearly 4% over five trading days, while the S&P 500 index rose by 3.7%, and the Nasdaq 100 index increased by over 5%, both registering their largest gains since November last year.