Gold prices reached a fresh record intra-day high of $2,130 on Monday but later in the session reversed gains, as traders re-evaluated the timing of a potential Federal Reserve interest rate cut in 2024. The surge in the value of the precious metal in recent sessions can be largely attributed to factors such as declining inflation, weakening labour market data, and a more dovish stance from the Federal Reserve, leading to speculation that the central bank might start reducing borrowing costs earlier in 2024 than originally expected.

Short-term demand for gold was further fuelled by an incident involving an attack on an American warship and commercial vessels in the Red Sea, heightening concerns about a possible escalation in Middle East tensions. In a Friday statement, Federal Reserve Chair Jerome Powell maintained the view that U.S. interest rates would remain elevated for an extended period. However, subtle shifts in his language, particularly an acknowledgment of progress in curbing inflation and the potential for a «soft landing» for the U.S. economy, strengthened expectations that the Fed might refrain from raising rates in December and could potentially commence rate cuts by March 2024.

Traders currently assign an almost 97% probability that the Federal Reserve will maintain rates within a range of 5.25% to 5.50% in the upcoming December meeting. Meanwhile, there is a more than 50% likelihood that the central bank will reduce rates by 25 basis points as early as March next year, a significant increase from the approximately 21% probability just one week ago.

Source: TradingView

The outlook of declining borrowing costs is favourable for gold, considering that higher interest rates increase the opportunity cost of investing in non-interest-bearing assets like gold. This concept had negatively impacted gold prices over the past year. Given the recent breakout gold prices are poised to extend the rally to $2,250 – $2,300, and possibly remaining above the $2,000 levels for considerable amount of time. Geopolitical uncertainty, a potentially weaker U.S. dollar, and the prospect of interest rate cuts are among the key factors supporting this bullish outlook.

Conclusion:

Gold prices have witnessed significant increase over the past two months, with the Israel-Hamas conflict boosting demand for the safe-haven asset. Gold typically performs well during periods of economic and geopolitical uncertainty due to its status as a reliable store of value. The anticipated decrease in both the U.S. dollar and interest rates throughout 2024 serves as significant positive drivers for gold.