Gold prices are concluding a remarkable year on a positive note, soaring to yet another all-time high as Treasury yields and the dollar continue to decline. This trend is driven by the widespread anticipation of interest rate cuts by the Federal Reserve.
According to FactSet, gold for February delivery (GCG24, -0.41%) closed at an unprecedented $2,093.10 per ounce on Comex Wednesday, marking the highest finish on record for the most actively traded contract (GC00, -0.41%). By early Thursday, gold for February had dipped by $8, or 0.4%, to $2,085.10 per ounce. Moreover, December gold expired at $2,081.90 per ounce on Wednesday, setting a new record for the front-month contract, as reported by Dow Jones Market Data.
Based on the most actively traded contract, gold’s value has surged by over 14% throughout this year.
The surge in gold prices coincides with the continued decline in Treasury yields and the weakening of the U.S. dollar against major currencies. On Wednesday, the rates for the 10-year note (BX:TMUBMUSD10Y) and the 30-year bond (BX:TMUBMUSD30Y) plummeted to their lowest levels since July. By contrast, the ICE U.S. Dollar Index (DXY), which measures the currency against a basket of six major rivals, has depreciated by 2.7% in December, placing it in negative territory for 2023.
The decline in bond yields is favorable for gold enthusiasts as it minimizes the opportunity cost of holding non-yielding assets. Additionally, a weaker dollar makes commodities priced in other currencies more affordable.
Marios Hadjikyriacos, a senior investment analyst at XM, highlighted several factors contributing to gold’s surge: the sharp decline in real yields, the weakening dollar, geopolitical instability, and increased direct purchases of gold by central banks seeking to diversify their reserves, particularly in China.
As we enter 2024, gold’s performance will hinge on the overall economic outlook and the timely delivery of a series of Federal Reserve rate cuts that investors are projecting, according to Hadjikyriacos.
Market participants predict a sequence of interest rate reductions by the Federal Reserve in 2024. Currently, Fed-fund futures traders have priced in an approximately 87% probability that the Fed will implement a rate cut by its March meeting, as indicated by the CME FedWatch tool.
Read: Why 2023 was a challenging year for commodities despite record-breaking prices for gold and orange juice.