Gold Rallies to New 3-Month Highs Amid Rising Rate Cut Expectations

Gold prices continued to surge in early trading on Wednesday, entering a sixth consecutive day of gains. Rising expectations that the U.S. Federal Reserve will cut interest rates and ongoing global trade tensions helped to push the yellow metal to its highest levels since February 21st.

Powell Opens Door to Rate Cut

Federal Reserve chairman, Jerome Powell signaled on Tuesday that the central bank is ready to cut interest rates if necessary. Stocks soared on the heels of the remarks with the Dow gaining over 500 points as the market saw an increase in the likelihood of a cut in rates.

On trade negotiations he stated:

We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.

While Powell did not explicitly state that the Fed would cut interest rates, his speech showed that the central bank was ready to mitigate potential damage from Trump’s trade wars. Lower interest rates make non-interest yielding assets such as gold more appealing.

Trade Wars

A slew of alarming headlines intensified trade related tensions last week; on Monday President Trump stated that the U.S. is “not ready” for a trade deal with China. The People’s Daily, China’s largest state owned newspaper, responded on Wednesday with a commentary titled “United States, don’t underestimate China’s ability to strike back”.

However, on Tuesday China’s commerce ministry appeared to adopt a more conciliatory tone, urging dialogue and negotiation to solve trade differences with the United States.

The Bottom Line

Analyst forecasts for weaker global economic growth has supported safe havens such as gold, the Japanese Yen and the Swiss Franc. Attention now shifts to Friday’s all important U.S. Employment Report, with analysts expecting unemployment to remain at 3.6% and for 185K new jobs added in May.