Gold price retreats from record as aggressive Fed pivot bets cool off

Spot gold fell by 2.2% by 12:30 p.m. New York time after leaping by more than 3% in Asia to hit a record $2,135.39 an ounce, surpassing the previous all-time high set in August 2020.

Gold’s rally to a new record had been turbocharged by Fed Chair Jerome Powell’s Friday comments that traders interpreted as setting the stage for a pivot toward rate cuts, spurring a plunge in US dollar and Treasury yields.

However, the greenback had rebounded by Monday morning, with the US dollar index rising by 0.5% to make bullion more expensive for other currency holders.

Investors will be on the lookout for a slew of key jobs readings over the next few days for clues on the Fed’s next steps.

The precious metal’s strength has been underpinned by a wider array of factors, from a wave of purchases by governments and central banks to geopolitical uncertainty, with 41% of the world’s population due to go to the polls next year.

Gold “is the answer for many things at the moment – whether it’s inflation carrying on, rate cuts or the uncertainty with very costly wars going on,” Jo Harmendjian, portfolio manager at Tiberius Group AG, told Bloomberg.

Bullion rally
Gold has risen more than 600% since the turn of the millennium, though adjusted for inflation it remains below the high of $850 touched in January 1980, which would be equivalent to more than $3,000 in today’s dollars.

The yellow metal typically has an inverse relationship with bond yields, falling as rising interest rates offer a more appealing alternative to gold, which pays no interest, and rising as they fall.

It has gained more than 10% since early October, as Treasury yields and the dollar have fallen amid growing expectations for US rate cuts. Swaps markets now see a more than 50% chance of a reduction in March and are pricing in a cut in May.

Some analysts argued that gold’s surge to a fresh record high was overdone, and prices slid to trade at $2,023.67 an ounce in New York.

The sharp move early on Monday looks like it was “more driven by stop-loss orders,” said Kelvin Wong, a senior market analyst at Oanda Asia Pacific Pte Ltd., who warned of a risk of a pullback in the short term.

Many investors have remained on the sidelines as gold surged higher, raising the possibility of further rallies as latecomers look to buy. Investors in gold via exchange-traded funds, a key driver of previous bull markets in the metal, have been sellers for much of this year, with holdings down by more than a fifth from a high in 2020.

“Market positioning is light versus previous times that prices tested these levels,” Wayne Gordon and Giovanni Staunovo, UBS Group AG strategists, said in a note. “To see even higher prices from this high base, investment demand needs to increase in the form of greater ETF purchases.”