Gold price sets new highs, with interest rate reduction expected

The price of an ounce of gold (28.3495 grams) set new records this Monday, April 1, reaching 2,262.19 dollars (about 2,104.95 euros) on the spot market and 2,265.6 dollars (about 2,108. 11 euros) in futures contracts, maintaining a sustained appreciation trend that began in mid-2018 and has continued over the last year.

Since November, when gold closed a month, for the first time, above 2,000 US dollars (around 1,863.4 euros, at the current exchange rate), the value of an ounce has increased by 13.35%. Since the beginning of the year, the appreciation has been around 9%.

The price of gold reacts to the monetary policy defined by the North American Federal Reserve (Fed) and the evolution of the dollar, which is a determining factor in the formation of its price.

“Gold’s rises are being driven by expectations around the time when interest rates in the US [Estados Unidos da América] should start to be reduced, and that is expected to be soon”, explains Henrique Tomé, analyst at brokerage firm XTB, to Jornal Económico (JE). “The most recent macroeconomic data on inflation were in line with analysts’ expectations and once again showed that price pressures are in fact easing in the world’s largest economy, which can be seen as an anticipation for the remaining economies” , he adds.

Analysts continue to predict that the Fed will cut interest rates at the beginning of the summer, even though the president of the US monetary authority, Jerome Powell, did not commit to a date last week and stressed that the Fed does not want to hasten the decline in the price of money.

“The behavior of yields [taxas de rendibilidade] in the secondary market is also supporting gold, even though the US dollar has been regaining some strength over the last few months”, says Henrique Tomé, considering that, “if the perspective surrounding the reduction in interest rates materializes, it should put pressure on the dollar and benefit gold.”

The appreciation of gold is also supported by direct purchases from central banks, which diversify their reserves, hoping that the slowdown in inflation will pave the way for lower interest rates.

China has also had a significant influence on the market, due to retail demand from investors, but also due to the action of the central bank. The appreciation of the “yellow metal” takes place within a context of appreciation of the dollar, which tends to negatively impact the evolution of gold, which indicates that there is real demand.

“This upward movement derives not only from the prospects of a reduction in interest rates in the USA, as well as in the euro zone, but especially from the strong demand for the precious metal, particularly from China, which has been transforming its sovereign reserves of dollars into -Americans for gold”, says Mário Martins, administrator of the brokerage ActivTrades Brasil, to JE.

To all this, there is geopolitical instability, with two relevant wars underway – with the Russian invasion of Ukraine and the conflict between Israel and the Palestinian Islamist group in Gaza –, from which gold benefits as a safe haven value.

“The geopolitical instability that has been witnessed has also supported gold valuations, however, it has been decreasing over time”, considers Tomé. “However, if tensions escalate again, it is to be expected that the price of gold appreciate it”, he warns.

The dollar has appreciated this year, especially in the last month, as shown by the DXY index, which compares the US currency with a basket of six other currencies – euro, Swiss franc, Japanese yen, Canadian dollar, pound sterling and krona Swedish –, which rose 2.4%, surpassing 105 points this Monday.