Is gold soaring on prospects of a Fed cut?

“The prospect that interest rates might have peaked is powering gold prices to record highs.

Futures for delivery of gold in December settled at $2,071 a troy ounce Friday, topping their previous high of $2,051.50 an ounce hit in August 2020. Gold has advanced for seven of the past eight weeks, bringing its gain this year to 11%. That puts futures on track for their best annual performance since 2020, when Covid-19 crashed the economy and lifted the precious metal 24%. Futures fell 2.3% to $2,024.10 on Monday.

The record is being watched closely on Wall Street, where gold stands at the intersection of several market crosscurrents at a particularly puzzling time. People often buy the precious metal as protection against inflation, but inflation is falling. Gold attracts investors seeking to hide out from economic downturns, but the economy remains strong, and expectations it will slow just moderately—while contentious—have helped fuel stock gains.

Many cite the potential for rate cuts from the Federal Reserve as a factor behind gold’s current climb. Expectations that rates will come down sparked rallies in stocks and bonds in recent weeks, with investors betting that cooling inflation means the Fed will cut with or without a recession. Bond yields have dropped sharply, including on an inflation-adjusted basis.

Investors often turn to gold instead of bonds when inflation-adjusted yields—known as real yields—decline. That reduces the benefit of bonds’ regular payments compared with gold, which pays no income. It also marks a switch from recent years, when rising real yields weighed on gold prices, disappointing those who had touted the metal’s potential as protection against the spike in inflation. The fall in yields has also dragged down the dollar, making gold cheaper for investors outside the U.S.

Investors tend to buy gold when they are nervous. Futures first crossed $2,000 during gold’s pandemic run, jumped after Russia invaded Ukraine in 2022 and leapt again when Silicon Valley Bank collapsed in March. Gold gained more than 5% in the week after Hamas attacked Israel on Oct. 7.

But investors said more prosaic worries abound, including fears that the rally in stocks and bonds has carried their prices too high, especially if the economy lands in a recession.

“Gold has become a proxy for Fed rate-cut expectations and general unhappiness,” said Nicky Shiels, metals strategist at MKS PAMP. “