- Gold approached $2,200 an ounce but is still below its inflation-adjusted peak, leaving investors who bought in late 2012 at a loss after accounting for inflation.
- The anticipation of Federal Reserve rate cuts, potentially totaling 95 basis points this year, has fueled optimism for gold’s further rise, potentially surpassing its previous inflation-adjusted record.
- The outcome of the Fed’s upcoming decisions, particularly the tone of the dot plot, will critically influence gold’s short-term performance and its long-term attractiveness as a non-yielding asset amidst declining interest rates.
Authored by Ven Ram, Bloomberg cross-asset strategist,
Gold is still hovering near a nominal record, but the scope for further gains from here may be limited.
Bullion approached $2,200 an ounce last week, annexing a new record, though stated in real terms, gold is still shy of its previous peak set more than a decade ago. Even at current levels, an investor who bought gold at the end of 2012, when it was trading around $1,675 an ounce, would still be sitting on losses of more than 3% after adjusting for the corrosive effect of inflation on the dollar.
Gold’s recent ebullience stems in no small measure from interest-rate pricing in the US, where traders have revived bets for deeper rate cuts after Chair Jerome Powell indicated last week that the Fed isn’t far from the level of confidence need to start loosening policy.
The markets are now pricing some 95 basis points of rate cuts from the Fed this year. A dovish dot plot this month – one I define as staying with the three reductions already indicated – may embolden traders to price in five full rate cuts this year.
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That will further engender a bid toward bullion, which will mean that it will eclipse its previous inflation-adjusted record of $2,250.
A hawkish dot plot would temper pricing for rate cuts and sap enthusiasm toward bullion, spurring a correction that may be well due in the short term.
Over the longer term, as the Fed actually starts cutting rates, bullion has potential, given that declining rates would enhance the allure of a non-yielding asset and its promise of high risk-adjusted return.
By Zerohedge.com
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