The Sudden Rise of Gold to Record Highs

Gold prices reached new record highs in March, supported by falling US bond yields and expectations of monetary policy easing. However, whether these supportive factors can continue driving the yellow metal's upward momentum remains.

A Sudden Realisation of Record Highs

US yields have declined since the start of March in tandem with rising gold prices, suggesting investors are increasingly pricing in interest rate cuts by the Fed. However, the lift-off for gold started in late February when US PCE inflation aligned with expectations, easing fears over rising prices and opening the door for an easing policy.

On Wednesday just past, Fed Chairman Jerome Powell reiterated the potential for rate cuts later this year, prompting a surge in gold. Central banks have also been accumulating bullion reserves at the fastest pace on record, tightening supply and sending prices higher. Some analysts also point to emerging troubles in regional US banking as additional support for price appreciation.

Nonetheless, questions remain over whether supportive drivers like dovish central bank stances and geopolitical tensions can sustain gold's parabolic rise. Much will depend on incoming economic data and how policymakers respond over the coming months.​

What Portion of Momentum Relates to Policy?

One argument in support of the notion that expectations around policy drive gold prices is to consider the counterfactual scenario. Following the ECB's slightly more hawkish meeting on Thursday, the price of gold denominated in euros struggled, closing flat instead of gains seen in dollar terms. During this period, the dollar weakened against a basket of currencies as markets returned to pricing in easing from the Fed.

In addition to central banks, recent trade data from China have supported metals, including gold. The Asian giant is the largest buyer of precious metals. However, given the recent influence that policy has had on gold prices, there is potential for a short-term correction ahead or after the Nonfarm payroll data release.

Strong numbers could erase some of the recent hope for earlier rate cuts, as the Fed would likely hold firm until it believes wages are easing inflationary pressures. Conversely, a weaker print could provide new impetus to gold's recent upward movement.​

Measured-Move Sees Higher Levels

Gold has advanced beyond its pennant pattern's upper boundary, moving toward the measured-move projection of $2220 per ounce. Support is currently anticipated to be near $2125, with stronger rejection expected at around $2090 and $2030. Should buying interest increase, resistance is expected at about $2300 at the next round price level.​

Source: SpreadEX / Gold Spot

Key Takeaways

Gold prices hit record highs due to falling US bond yields emerging from dovish central bank rhetoric and easing policy expectations globally. The lift-off came about when PCE data eased fears over rising prices and opened the door to a more accommodative Fed policy stance. Chairman Jerome Powell also reiterated the potential for rate cuts later in the year. While supportive factors have driven gold's rise, questions remain about whether they can be sustained, given the dependence on incoming data and future policy.