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Gold’s Sudden Record High, and Possibly Higher?

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The price of gold has rocketed higher all this month, marking a significant trend in gold price activity. That’s great news for gold bulls, but after such a meteoric rise, what about a correction? And after that, will it resume its upward journey, or is this just a bump along the road?

Back at the start of the year, we already talked about how the economic landscape is titled in favor of upside for the yellow metal. So, is this part of that trend as expected gold price trend , or has something unexpected happened? Well, it’s kind of both, as a short-term trend comes up against a long term trend, which has aided the recent breakout in gold prices.

What Happened?

The catalyst for the latest move was the release back on Feb 29 of the US PCE index for January. That’s the preferred measure of inflation for the Fed, and they rely on it heavily to determine monetary policy. The data came in bang in line with expectations, which normally wouldn’t drive the markets all that much. The difference is that the data confirmed a general notion that the Fed was headed for easing soon, and pushed back on a short-term trend.

Prior to the PCE release, the data out of the US was showing that inflation might not be really under control just yet, which had led to a pull-back in expectations of when and how much the Fed would ease. In January, the market was pricing in as much as 6 rate hikes, possibly starting in March. By the end of February, that had shifted to only five hikes, starting maybe in June. The US benchmark yield had climbed substantially in that period, as well. That short-term trend was cut off by the longer-term trend as evidenced by the PCE data continuing to decline.

Affirming the Narrative

The notion of easing was further affirmed in the middle of the week when Fed Chair Jerome Powell gave his much-anticipated testimony before Congress. Again, his comments didn’t offer anything new, but his reassurance that rates would move lower later in the year was seen by the market as a sign that the trend towards easier policy was still in place. Yields in US treasuries continued to decline.

The yields are important here, because they offset demand for gold. Investors looking for safe havens usually choose between gold and treasuries, and if higher rates are expected, then treasuries can offer a higher return on investment. Gold doesn’t pay interest or dividends. So, lower yields, and the expectation that they will continue lower, typically helps drive gold price trend higher.

Where To From Here?

When gold priced in Euros, it has remained pretty much flat after the recent ECB meeting  which was seen as providing a more hawkish outlook than expected. That suggests that the recent price gains in gold have been thanks to weakness in the dollar.

How likely this trend is to continue will depend on how expectations for rate cuts from the Fed evolve. And that leaves today’s NFP as one of the main risk factors that could jam up the recent gains. A substantial beat in expectations for the jobs numbers could mean that the labor market is still tight, and the Fed will keep rates higher for longer. But a miss in the data could provide new impetus for gold if it comes with another drop in yields.

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