Gold Surges 2% as Fed Rate Cut Expectations Boost Prices

Gold prices surged, breaking historical inflation-adjusted peaks, as expectations of a rate cut by the Federal Reserve drove a fourth consecutive week of gains. The price of gold exceeded $3,650 per ounce, marking a near 2% increase for the week, with intraday highs setting new records. Concurrently, silver prices rose above $42 per ounce, reaching their highest level since 2011. This surge was fueled by August's consumer price index data, which showed an expected rise, providing the Federal Reserve with justification to lower borrowing costs amidst a series of weak labor market reports.

Market participants have priced in at least a 25 basis point rate cut at the upcoming Federal Reserve meeting, with potential for two more cuts by year-end. The week saw a decline in the dollar and 10-year Treasury yields, conditions typically favorable for precious metals. Gold has already risen nearly 40% this year, outperforming major market indices, including the S&P 500. Central bank purchases, geopolitical uncertainties, and inflows into exchange-traded funds (ETFs) have supported this rally. Beyond the nominal record set this week, gold prices also surpassed the inflation-adjusted peak from over 45 years ago.

Analysts note that while gold has more than doubled in the past three years, the risk of a buy-and-hold strategy at these levels is increasing. Investors are now more inclined to trade based on news and momentum rather than long-term holding, suggesting that price movements will remain volatile but not unidirectional. For those seeking lower-cost entry into the precious metals rally, silver could be a beneficiary.

In Asia, households are poised to increase gold purchases for the fifth consecutive year, driven by a stronger local currency making gold more affordable. This trend complicates the central bank's efforts to mitigate gold's impact on the local currency. Meanwhile, palladium prices rose nearly 8% this week, while platinum approached $1,400 per ounce.