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Gold prices reach six-month high amidst Fed rate hike speculations

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2023-11-28

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The price of gold surged to a six-month high on Monday, driven by growing investor confidence that the US Federal Reserve has concluded its series of interest rate hikes and a weakening US dollar.

Spot gold prices rose by 0.6 percent, reaching $2,014.55 per troy ounce, marking the highest level since mid-May. This surge contributed to the precious metal's gains, which have now surpassed 10 percent since hitting a seven-month low at the beginning of October. Despite this impressive performance, gold remains around 3 percent below its all-time high, recorded in August 2020, and later retreated to trade at around $2,010.

Gold's remarkable ascent is largely attributed to the declining value of the US dollar, which has seen a 3 percent drop against a basket of six major currencies throughout November. This depreciation makes purchasing the precious metal more affordable for investors holding currencies other than the US dollar.

Additionally, soft economic data in the United States has strengthened expectations that interest rates will not see any further increases this year and may even be reduced in the coming year. Yields on two-year Treasuries, sensitive to interest rates, have dropped from 5.2 percent, their highest level since 2006, in mid-October to 4.94 percent. Gold, which does not offer any interest income, becomes relatively more attractive when interest rates are low.

Ewa Manthey, a commodities strategist at Dutch bank ING, emphasized the crucial role of the US rate outlook in driving gold prices, stating, "Lower rates are typically constructive for gold because it doesn't yield any interest."

Manthey also pointed out that concerns about an escalation in the conflict between Israel and Hamas have contributed to the increase in gold prices. Gold is often considered a safe haven asset in times of geopolitical instability. She added, "Although the risk of the conflict in the Middle East seems to be contained, at least for now, that will keep being supportive for the gold price."

Analysts are optimistic about gold's future performance, with expectations that it could potentially test its all-time high of just below $2,075 per ounce by the end of 2023. This previous peak in August 2020 occurred when the COVID-19 pandemic weighed on the dollar, and investors sought refuge in less risky assets.

ING forecasts suggest that gold will continue to reach record highs in 2024, with an average price of around $2,100 per ounce in the fourth quarter, surpassing the previous record.

Central banks have played a significant role in driving gold demand, purchasing a record 1,136 tonnes of gold in the previous year and an additional 800 tonnes in the first three quarters of 2023, according to the World Gold Council. China's People's Bank led the way, acquiring 181 tonnes, followed by Poland with 57 tonnes and Turkey with 39 tonnes. This significant demand for gold from central banks helped support its price when bond yields were rising earlier in the year.

In contrast to gold, the companies involved in gold mining have struggled in 2023, facing challenges such as rising labor, fuel, and material costs, along with increased borrowing expenses. The NYSE Arca Gold Miners index, which tracks a mix of small and large-cap groups in the industry, has only seen a modest 1 percent gain since the beginning of the year.

Silver prices have outperformed gold in recent days, surging more than 4 percent since last Thursday. Ross Norman, CEO of Metals Daily, a precious metals data provider, commented on this unusual trend, stating, "The fact that silver has led gold, which is such a rare thing, suggests to me that this is a speculatively driven hit on the market, driven by expectations of the Fed cutting rates."

Analysts anticipate strong demand for gold to persist for the remainder of the year, citing factors such as the Indian wedding season, Christmas, and Chinese New Year as potential drivers of bullish sentiment in the market.

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