Gold sparkles and may gleam more as interest rates move lower

(Alliance News) - Gold hit another record high on Friday, and a push to the USD2,600 an ounce mark could be its next move, as buyers pile into the precious metal in the face of a tamer dollar.

Gold, which typically has an inverse relationship with the greenback, traded as high as USD2,570.45 an ounce on Friday, its best-ever level.

Given its divergence with the dollar, the yellow metal may stand to benefit as the Federal Reserve kicks off its rate cutting cycle. A 25 basis point cut is expected by the US central bank this week, though some have the conviction a half-point cut to the federal funds rate is possible.

Hargreaves Lansdown analyst Derren Nathan commented: "Gold prices have reached new record highs of over USD2,500 per ounce. The glittering performance has been buoyed by sustained high levels of purchases by central banks in the face of a weakening dollar, geopolitical uncertainty and the downward looking trajectory for interest rates. These conditions could persist for a while so there's potential for the high-water mark to rise further in the coming months."

Pepperstone analyst Michael Brown considered whether gold's rip-roaring rise will continue.

Brown added: "Despite... what were largely rudderless conditions as conviction remained somewhat lacking, gold did find healthy demand. The yellow metal has started to shine once more, with spot rising to fresh all time highs yesterday, north of USD2,550/oz. Clearly, the bulls continue to believe in their soul, with the power to know, that they're indestructible.

"At least for now, that is. Gold's gains yesterday were not supported by any particularly obvious fundamental driver, with sentiment again relatively firm, the dollar broadly flat, and Treasuries actually trading softer on the day. Central bank demand, particularly in emerging markets, has been the apparent driver of most of the year-to-date gains, though long gold may equally just be turning into a momentum trade once more."

The Fed's next interest rate decision is on Wednesday. Dutch bank ING noted the past few hours have seen bets on a 50 basis point cut increase.

"Remarks from former FOMC member Bill Dudley and some media reports pointing to a close 25bp-50bp decision have triggered a fresh round of dovish Fed bets ahead of next Wednesday's meeting. The risks appear skewed to increasing speculation on a half-point move," ING explained.

"One part of his speech that particularly struck us is this: 'It's very unusual to go into the meeting with this level of uncertainty – usually the Fed doesn't like to surprise markets'. One possible interpretation is that markets themselves can tilt the balance towards a half-point move should their dovish bets be pent up into Wednesday's meeting. There were also some media reports suggesting it would be a close call between 25bp and 50bp, which contributed to the dovish repricing.

By Eric Cunha, Alliance News news editor

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