Gold prices hit record high above $2,100 on bets of early Fed cuts

Investing.com-- Gold prices surged to a record high in Asian trade on Monday, extending a raft of recent gains as markets bet that the Federal Reserve could begin cutting interest rates by as soon as March 2024, even as central bank officials remained cautious. 

The yellow metal appreciated sharply in recent sessions as easing inflation, soft labor market data and some less-hawkish signals from the Fed fueled speculation that the bank will cut interest rates in early-2024.

Near-term demand for gold was also fueled by an attack on an American warship and commercial vessels in the Red Sea, which ramped up concerns over an escalation in the Israel-Hamas war.

Chair Jerome Powell, when speaking on Friday, reiterated his stance that U.S. rates will remain higher for longer. But some changes in his signaling- particularly that he acknowledged the progress made towards curbing inflation and the potential for a “soft landing” for the U.S. economy- reinforced expectations that the Fed will no longer raise interest rates in December, and potentially begin cutting them by March 2024. 

Spot gold jumped nearly 2% to a record high of $2,148.78 an ounce, while February gold futures also jumped 2% to a record high of $2,151.20 an ounce. Both instruments were trading slightly off their highs by 19:16 ET (00:16 GMT). 

The yellow metal saw strong gains last week, and also rose for a second consecutive month in November.

Fed seen cutting rates in March, but more economic cues on tap this week

Fed Fund futures prices show a 97% chance the Fed will keep rates on hold in December, and a 60% chance that the central bank will trim rates by 25 basis points to a range of 5% to 5.25%, according to CME Group’s Fedwatch tool. This compares to traders pricing in a 21% chance for March cut one week ago.

The prospect of easing interest rates bodes well for gold, given that higher rates push up the opportunity cost of investing in the yellow metal. This notion had battered bullion prices over the past year as the Fed began aggressively hiking interest rates. 

But markets still have a slew of economic signals to contend with in the interim. Nonfarm payrolls data for November- a key gauge of the labor market- is due later this week, while inflation readings for the remainder of the year are also due in the coming weeks. 

Some facets of the labor market remain strong, while inflation also remains comfortably above the Fed’s annual target- a trend that if persistent, diminishes the prospect of an early rate cut. 

The Fed is set to meet in mid-December.