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Why gold prices look likely to smash more records

Gold climbed sharply on Tuesday as bets for U.S. interest-rate cuts led prices to fresh record highs and some analysts touted long-term prospects for further gains in the precious metal.

“Like stocks and bonds, gold just wants to go higher — and for the same reason,” said Adrian Ash, director of research at BullionVault. The Federal Reserve is “finally preparing to cut rates because it believes it’s got inflation beat.”

Expectations for Fed interest-rate cuts later this year have led to weakness in the dollar and Treasury yields, boosting the metal’s investment appeal.

“Thanks largely to weakness in economic data and falling inflationary pressures, bond yields are continuing to remain under pressure,” said Fawad Razaqzada, a market analyst at City Index and Forex.com. That’s helping to “boost the appeal of low- and zero-yielding assets, and thereby keeping the gold outlook positive.”

In Tuesday dealings, the yield on the 10-year Treasury BX:TMUBMUSD10Y was at 4.179%, down from 4.231% on Monday, while the ICE U.S. Dollar index DXY traded up by 0.1% at 104.34 but was down 1.4% month to date.

There is “no doubt that the recent surge in gold prices can be at least partially attributed to a declining dollar and falling bond yields, thanks to weaker-than-expected U.S. data and an unexpected drop to 3% in U.S. consumer inflation last week,” Razaqzada said. “These factors have enhanced the attractiveness of assets with low or no interest returns,” such as gold.

On Comex Tuesday, the August gold contract GC00, +1.84% GCQ24, +1.84% climbed $38.90, or 1.6%, to settle at $2,467.80 an ounce, topping the previous record-high $2,438.50 settlement from May 20. Prices traded as high as $2,470.20, above the previous record intraday high of $2,454.20, also from May 20, according to Dow Jones Market Data.

Strength in gold contributed to a rise in the SPDR Gold Shares exchange-traded fund GLD to a new all-time intraday high Tuesday, based on data going back to Nov. 18, 2004. It was up 1.8% at $227.87 in Tuesday dealings after touching a high of $227.98.

Holdings in gold ETFs peaked in October 2020 and have declined 26% since but appear to have bottomed in May 2024, said Ryan McIntyre, managing partner at Sprott.

They’re now “starting to increase again,” he told MarketWatch, adding that he believes there could be a “new wave of demand for gold coming through this channel, particularly with financial advisers and institutions.”

Gold prices had teased a fresh record-high settlement on Monday after the assassination attempt on former President Donald Trump likely “created political uncertainty,” Edmund Moy, senior IRA strategist for precious-metals distributor U.S. Money Reserve, told MarketWatch in recent comments.

Support from political uncertainty that day then gave way to two factors affecting gold: the anticipation of Federal Reserve Chair Jerome Powell’s remarks on what the central bank is thinking before its meeting later this month, and the disappointing GDP numbers from China, said Moy, who’s also a former director of the Treasury Department’s U.S. Mint.

On Monday afternoon, Powell said he would not signal at what meeting the central bank might make the first cut to its benchmark interest rate.

“June’s cooling inflation and job market may be enough impetus for the Fed to start cutting rates soon, which if the cuts start, will likely boost gold,” said Moy. “And with new data showing China’s economy continues to struggle, Chinese investors have few alternatives — but gold is one of them.”

He added: “Rising gold demand and limited gold supply usually equals higher gold prices.”

Still, if the Fed remains cautious and wants to see more supportive data before cutting rates, gold prices may see a “short-term negative impact,” Moy said.

Over the medium to long term, however, “most of the factors that drive up gold prices haven’t changed: eventual interest-rate cuts, greater geopolitical instability, China’s struggling economy and central bank demand for gold,” he said.

Source:  marketwatch.com