Gold prices shattered records this week, topping $2,150 an ounce. This vigorous rally has been fueled by a weakening U.S. dollar and falling Treasury yields on wagers that the Federal Reserve could start slashing borrowing costs earlier than suggested by policymakers.
While Fed Chair Powell has signaled that the central bank is in no rush to cut rates and would need more evidence that inflation is converging to 2.0% on a sustainable basis before pulling the trigger, traders remain skeptical and are betting on the easing cycle starting as soon as June, spurred in part by a resurgence of the regional banking crisis.
The disconnect between Powell’s message and market expectations appears to be driving bond yields lower, reinforcing bullion’s appeal. For context, the yellow metal tends to rise when interest rates move down, as this reduces the opportunity cost of holding non-yielding assets.
In any case, Friday’s critical U.S. non-farm payrolls report will be the ultimate arbiter for Wall Street and the Fed. Economists predict the U.S. economy added 200,000 jobs in February, but an upside surprise should not be ruled out, with recent employment data coming consistently above estimates.
A robust jobs report could vindicate Powell’s relatively hawkish stance, prompting traders to unwind dovish bets on the FOMC’s policy path. This scenario should weigh on gold prices. Conversely, weak job growth could cement the belief in early rate cuts, sending precious metals even higher.
Source: DailyFX
