Gold prices pared their weekly losses on the back of hotter-than-expected inflation data and signs of a cooling labor market, which intensified debate over the Federal Reserve’s anticipated interest rate cut next month. The precious metal, which is highly sensitive to interest rate movements, gained as much as 0.7% to trade at $2,647.25 per ounce, adding to gains made in the previous trading session.
Inflation and Labor Data Shake Markets
Recent U.S. economic reports have painted a mixed picture. Data released on Thursday revealed underlying inflation rose more than forecast in September, while unemployment benefit applications reached a more than one-year high. The uptick in jobless claims signals a potential slowdown in the labor market, which could ease the Fed’s concerns about the overheating economy.
This combination of factors—higher inflation and weakening labor market—has fueled speculation about the Federal Reserve's next move. Swaps markets are currently pricing in a 25-basis-point rate cut for November. Fed policymakers, including John Williams, Austan Goolsbee, and Thomas Barkin, appeared unfazed by the inflation surprise, suggesting that the Fed could still proceed with lowering rates to balance inflation management with economic stability.
Impact on Gold Prices
The prospect of lower interest rates has bolstered the demand for gold. Unlike bonds or savings accounts, gold doesn’t yield interest, which makes it more attractive when rates decline. When borrowing costs decrease, holding non-yielding assets like gold becomes more appealing to investors. As a result, bullion has risen by more than 25% in 2024, with the possibility of rate cuts driving recent gains.
Gold has also found support from other key factors this year, including strong central bank purchases and rising geopolitical tensions. Central banks, particularly in emerging markets, have been increasing their gold reserves as a safeguard against economic uncertainties. Meanwhile, hostilities in the Middle East have intensified haven demand, with investors turning to gold as a protective asset amid fears of escalating conflict between Israel and Iran.
Geopolitical Tensions Add to Gold's Appeal
The growing conflict in the Middle East has heightened the demand for safe-haven assets like gold. As Israel gears up for retaliation against Iran, geopolitical uncertainty is pushing investors toward assets perceived as less risky. Historically, geopolitical crises often lead to a surge in gold prices, as the metal is considered a store of value during times of turmoil.
Additionally, heightened geopolitical risks compound existing concerns about global economic stability. With the U.S. grappling with inflation and labor market instability, and Europe facing its own set of economic challenges, gold remains an attractive option for those seeking to hedge against both political and financial uncertainty.
Outlook for Gold
As of Friday morning, spot gold was trading at $2,639.00 per ounce, reflecting a modest 0.4% increase. Despite this rise, gold remains on track for a slight 0.4% weekly decline. However, the potential for lower interest rates, combined with central bank demand and geopolitical risks, is expected to support gold prices in the near term.
The Bloomberg Dollar Spot Index remained flat, reflecting relative stability in the dollar. Meanwhile, other precious metals showed mixed results: silver declined, while platinum and palladium posted gains.
Looking ahead, the trajectory of gold will largely depend on the Federal Reserve's monetary policy decisions and the evolution of geopolitical tensions. If the Fed proceeds with rate cuts in November, gold could see further gains, solidifying its status as a key asset in uncertain times. Investors will continue to monitor U.S. economic data closely, as well as developments in the Middle East, both of which are critical drivers for gold’s performance in the coming months.
Brian
Weiliang
Miyuki