Gold hits record highs on ECB rate cut, US Fed easing optimism grows

The spot price of gold climbed to $2,567 per troy ounce, marking a 1.5 per cent increase from Wednesday and continuing its impressive 24 per cent gain for the year.

The ECB cut interest rates by 25 basis points on Thursday, its second reduction this year, amid sluggish eurozone growth and cooling inflation. This decision follows a period of aggressive rate hikes aimed at curbing inflation, which has now fallen closer to the ECB’s 2 per cent target. The bank also lowered its 2024 growth forecast to 0.8 per cent.

We cut our key interest rate by 0.25 percentage points.

We did this because inflation is gradually coming down and has been developing as we expected.

Read our monetary policy decisions https://t.co/Xk4mSWfMzH pic.twitter.com/IUNpRmPNNa

— European Central Bank (@ecb) September 12, 2024

The ECB’s decision to implement its second rate cut in three months has fueled investor optimism about declining global interest rates. This move, coupled with expectations of the Federal Reserve’s potential rate cuts, has created a favourable environment for gold, which typically thrives in low-interest-rate scenarios.

“The precious metal, gold, has been on a meteoric rise, reaching unprecedented heights. This surge is primarily driven by several factors, including expectations of a Federal Reserve interest rate cut, a weakening US dollar, and geopolitical tensions,” said Mohamed Hashad, Chief Market Strategist.

The ECB’s rate cut comes amidst sluggish economic growth in the eurozone and cooling inflation. The central bank also lowered its 2024 growth forecast to 0.8 per cent, down from an earlier projection of 0.9 per cent, citing “weaker contribution from domestic demand over the next few quarters.”

Investors are now turning their attention to next week’s Federal Reserve policy meeting. Recent US economic data, including a slight increase in initial jobless claims and a modest rise in producer prices, has bolstered expectations of a rate cut.

“As the Federal Reserve signals a potential easing of monetary policy, investors often turn to gold as a safe-haven asset. Lower interest rates typically reduce the opportunity cost of holding gold, which does not generate interest income,” Hashad added.

Geopolitical tensions fuel gold’s rise

Adding to the economic factors driving gold’s ascent, geopolitical uncertainties have played a significant role in boosting the precious metal’s appeal, according to Hashad.

“Geopolitical uncertainties have further contributed to the surge in gold prices. Global tensions, such as trade disputes, regional conflicts, and geopolitical risks, can lead investors to seek refuge in safe-haven assets like gold,” he said.

The perception of yellow metal as a reliable store of value during times of political and economic turmoil has been a key driver of demand. As international relations become increasingly complex and unpredictable, investors are turning to gold as a hedge against potential market disruptions caused by geopolitical events.

“The perception of gold as a store of value and a hedge against economic turmoil has driven demand,” he added. This sentiment reflects the ongoing concerns about various global issues, including trade tensions between major economies, regional conflicts in various parts of the world, and the broader geopolitical landscape that can impact financial markets.

The weakening US dollar has also contributed to yellow metal’s appeal. “A weaker dollar can boost the appeal of gold, which is priced in US dollars. When the dollar declines, gold becomes more affordable for investors holding other currencies,” he explained.

However, experts caution that while the outlook for gold appears favourable, investors should remain vigilant.

“The market can be volatile, and prices can fluctuate significantly. Investors should carefully consider their risk tolerance and investment goals before allocating funds to gold,” Hashad advised.