Gold Flirts With New Record High On U.S. Interest Rate Outlook

Gold casting grain.

(Bloomberg) -- Gold — a safe-haven asset that generally thrives during times of lower interest rates and geopolitical upheaval — is understandably having a moment.

As investors bet the Federal Reserve will trim rates in June following a slew of mixed US data reports, the precious metal that's stored in both federal depositories and individuals' sock drawers is now within striking distance of a new all-time high. Gold rose above $2,100 an ounce on Monday, quickly nearing the metal's $2,135.39 peak.

“We still think it could go higher as well,” said Ryan McKay, senior commodity strategist at TD Securities. That's because some discretionary macro traders are underinvested in the metal “relative to historical norms heading into a Fed cutting cycle.” TD Securities sees gold moving to $2,300 or higher once the Fed starts cutting rates.

Financial investors typically start buying gold ahead of rate cuts, since non-yielding assets, like gold and silver, tend to perform well in lower-rate environments. Nearly three in five investors bet the Fed is nearing its first US interest-rate cut since early 2020, swaps markets data show. Although the timing and magnitude of the US central bank's rate cut path has been unclear, the wider expectation of coming cuts has helped the precious metal largely hold above the key $2,000-an-ounce level since mid-December.

Unlike other investing trends that come in and out of style — from SPACs to crypto — gold has always had a place in many investors' portfolios, though demand ebbs and flows with external events. In addition to watching for rate cuts, investors typically want to own bullion in times of economic and political uncertainty; a polarizing, upcoming US presidential election and ongoing wars in Ukraine and Gaza certainly fit the bill. Strong physical buying from central banks and investors in Asia has also been a pillar of support.

“The bid for gold from sovereign reserve managers is sure to hold strong as Moscow and NATO talk openly about the risk of direct conflict,” said Adrian Ash, director of research at BullionVault. Central-bank demand is helping offset profit-taking by investors looking to cash in on the higher gold prices, he said.

Robust buying by investors has been reflected in gold exchange-traded funds, with holdings of SPDR Gold Shares (GLD) seeing their first daily inflow in nine trading sessions on Friday, Bloomberg data show. Gold ETFs were the main driver in the precious metal's rally to a then-all-time high during the pandemic, but higher rates have largely driven away buyers since 2022.

The surge in gold buying is especially strong from hedge funds and money managers, who are now in a rush to reestablish bullish wagers on the metal, despite headwinds such as the strength in the US dollar, according to Ole Hansen, head of commodity strategy at Saxo Bank A/S.

Investors “have been forced back into the market on the long side,” Hansen said. “The rebuilding of long positions may take a few days and if gold stays above $2,088 at today's close, I would expect more buying then.”

The latest CFTC data showed hedge fund and money managers boosted their net bullish gold bets to a three-week high as of Feb. 27, helping to pull bullish bets on the haven asset off recent lows.

Spot gold was up to $ an ounce as of in New York. Silver and platinum also gained.

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