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Gold prices rose to all-time highs on Wednesday as traders responded to signals that the US Federal Reserve is preparing to cut interest rates later this year even as inflation remains above the central bank's target.
Safe-haven assets have risen 15 percent since mid-February to reach $2,288 an ounce on Wednesday, also supported by concerns about the potential escalation of conflict in the Middle East. It later pared gains to trade 0.2 percent higher on the day at $2,284 an ounce.
Two Federal Reserve officials said on Tuesday that three interest rate cuts this year would be “reasonable,” even though the world's largest economy continues to perform strongly, with consumer prices rising slightly in February. Gold, which offers no return to investors, tends to benefit from lower so-called real interest rates – inflation-adjusted borrowing costs.
“The expectation of lower real interest rates remains an important driver of gold’s bullish outlook,” said Johnny Teves, precious metals analyst at UBS. “As long as the Fed remains dovish, there is a risk of larger declines in real interest rates if inflation surprises to the upside.”
Analysts said traders are buying gold – known as an inflation hedge – to protect themselves from the risks of rising inflation, which would push real interest rates lower.
Brent crude, the global oil benchmark, has risen about 18 percent since mid-February to reach nearly $90 a barrel, raising concern about a rebound in inflation.
“The market is interpreting that the Fed is willing to absorb higher inflation when it cuts interest rates,” said Michael Widmer, commodities strategist at Bank of America.
Investors have begun to pay increasing attention to gold as a protection mechanism against concerns about rising US debt levels, which will be a focus in the run-up to elections this year, according to Widmer.
Gold's rally has been given further momentum by investors buying call options in the futures market, aiming to benefit from a rally driven by voracious demand from central banks and Chinese consumers, who are snapping up gold at record levels.
Analysts also said that Israeli strikes on the Iranian consulate in Syria increased gold's appeal as a safe haven.
“Power begets power,” said Robin Bahar, an independent precious metals consultant. “[Gold] “It appears to be in the hands of speculative traders who are accumulating and want to see this thing move much higher.”
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Gold remains a long way from its real all-time high since 1980, the equivalent of more than $3,000 an ounce after adjusting for inflation.
However, some analysts warn that gold's rise from just over $1,800 an ounce six months ago appears overdone, particularly in light of the risk that the Fed and other major central banks will cut interest rates more slowly than currently expected due to rising inflation. .
“The US economy is surprising with its strong performance, which should make the first interest rate cut in June less likely and thus weigh on the gold price,” said Alexander Zumpfy, chief precious metals trader at Heraeus, a precious metals refiner. But he added, “It seems as if gold turns every development in the market into an increase in prices.”
