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Gold starts December with all-time highs; but can continue to ignore a hawkish Fed

December 1, 2023

NEW YORK (December 1) A record closing price in November wasn't enough for gold investors, as solid momentum has pushed prices to an all-time high ahead of the weekend.

February gold futures last traded at $2,091.90 an ounce, up more than 4% from last Friday's close. Gold's previous record was at $2,089.20 in August 2020.

Gold is seeing renewed buying momentum as markets continue to price in a potential rate cut as early as March. The precious metal's rally comes even as the central bank maintains its tightening stance. Friday, Federal Reserve chair Jerome Powell said that he is still not confident monetary policy is sufficiently restrictive enough to bring down inflation to 2%.

However, markets are paying little attention to what Powell is saying, as the CME FedWatch Tool shows that markets are now pricing in a more than 50% chance of a rate cut in the first quarter of 2024.

"The precious metal remains supported by Fed cut bets while technical factors continue to support the upside momentum,' said Lukman Otunuga, Manager of Market Analysis at Forexlive.com. "In the absence of any fresh fundamental catalyst, November's monthly close above $2000 could provide a foundation for bulls to send prices higher."

Naeem Aslam, chief investment officer of Zaye Capital Markets, said this could be the start of a bigger move for gold with "bright days ahead."

"We believe that the Fed has reached its peak of rate hike cycle regardless of what some members of the Fed continue to say," he said. "We believe that there are actual real chances that the Fed will cut the rate towards the back end of Q1 next year. However, the threat remains stubborn inflation. If we don't see CPI flirting with the 3% mark or even lower, the Fed may keep rates at the current level till the end of H1."

Although the Federal Reserve's aggressive monetary policy still poses a risk for gold, some analysts have said that a slowing economy means that, ultimately, the Federal Reserve's next move will be to cut rates, potentially sooner rather than later.

Robert Minter, director of ETF Investment Strategy at abrdn, said that cracks continue to appear in the U.S. commercial real estate market as the sector continues to feel the effects of the Federal Reserve's aggressive rate hikes and high vacancies as workers continue to work from home.

"If – that's a big ‘if,' but if we are seeing the beginning of commercial real estate bubble popping, there will be more money printing. That's part of what we are seeing with the gold price again today. Another part is the market pricing in no more rate hikes, and a higher potential for rate cuts in the near future. – then we could get a gold bull market like the last three times the Fed Funds rate cycle was in this spot," Minter said in a comment to Kitco News.

Minter added that the last three times the Federal Reserve has paused its tightening cycle, gold has rallied 57%, 235% and 69%, respectively. He pointed out that gold prices are so far up 5.4% since the Fed moved to a neutral stance.

Nicky Shiels, head of metals strategy at MKS PAMP, also noted that gold could be catching a safe-haven bid even as economic data remains fairly resilient.

"Gold is internalizing that people do not feel that way. Experts talk of a ‘rupture in our economic health and social fabric,' but less dramatically, people are simply feeling worse off than before and that's being expressed through havens," she said.

At the same time, analysts note that gold prices continue to move higher even as most retail investors shun the market. Analysts have said that gold prices will really move when this sentiment starts to shift.

Despite this optimism, some analysts recommend investors be cautious with gold at these levels and not to chase the market.

Barbara Lambrecht, commodity analyst at Commerzbank, said that gold prices could be limited ahead of next Friday's nonfarm payrolls report.

"This is because the current expectations of Fed rate cuts of 50 basis points by mid-2024 are more likely to be disappointed. Accordingly, we also envisage a correction in the gold market. This could be triggered by the US labor market report at the end of the week," she said.

Some economists have said that investors should also pay attention to the University of Michigan consumer sentiment survey as inflation expectations have been elevated in recent months.

Phillip Streible said he also thinks the market has gotten a little ahead of itself as a March rate hike seems unlikely. He noted that it is unlikely the Fed will cut rates until inflation is closer to its 2% target.

KitcoNews

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