Gold Shines on Fed Cut Hopes: Is the Dollar Doomed?

On Dec 8, investors witnessed renewed optimism in the global bullion market. Gold prices edged higher to capitalize on the softening US dollar. Spot gold traded up 0.3% at $4,206.99/ ounce (as of 0118 GMT). However, the US gold futures for Dec 2025 delivery saw a marginal adjustment, trading at $4,236.30/ounce.

In the currency markets, the US dollar hovered near six-week lows. The price action was largely a response to an 88.4% rate cut probability placed for the US Fed meeting scheduled on Dec 9 - 10.

So, the dollar index seems to be retreating, setting the stage for a strategic week in the financial markets.

A convergence of macroeconomic factors is currently pulling the precious metal prices up. Also, monetary easing is anticipated and signs of fatigue in the US economic engine cannot be ignored.

The investors are awaiting the final verdict from the Fed. But there is an important question emerging. Is the market correctly pricing in a dovish shift, or is there room for a surprise?

Why is the Greenback Losing its Grip?

There is an inverse relationship between the gold prices and the US dollar movement. This inverse relationship is currently drawing the economic picture.

A strong dollar acted as a headwind for commodities for most of the year, making them more expensive for holders of other currencies. However, now, the greenback has considerably softened. It is hovering near multi-week lows, immediately making the gold shine brighter for overseas buyers.

The US dollar weakness is directly reflecting the underlying health of the US economy. As per the recent data releases, the US economy could be losing its momentum.

The bedrock of US economic growth i.e., consumer spending, is showing signs of moderation following a period of solid gains. Finally, the high-interest-rate environment is biting the average household. Furthermore, the rising cost of living and a lacklustre labour market are curbing appetite for expenditure.

Private payroll data has also sent jitters through the market. As per the data, there is a sharp decline, hinting at cracks in the employment sector. Thus, the broader narrative being digested by the market is one of economic deceleration. Effectively, the market is expecting the "US exceptionalism" trade to enter a cooling phase.

Are Policymakers Finally Blinking on Rates?

The "Fed Watch" is heavily influencing the gold market sentiment. Investors are now looking forward to when and by how much the rates are falling.

Dovish commentary from numerous Federal Reserve officials is reinforcing the belief that the central bank is ready to enter a cycle of easing. This shift is crucial for non-yielding assets, like gold.

Gold, unlike bonds or savings accounts, does not pay interest. In a high-rate environment, the "opportunity cost" of holding gold is high. However, with solidifying expectations for lower interest rates, this opportunity cost would diminish. Thus, the prospect of cheaper money is making gold competitively more attractive.

Furthermore, traders have positioned themselves ahead of the upcoming policy meeting and are betting that the central bank will act to cushion the slowing economy.

Thus, weak economic data has fuelled asset price rallies because of its stimulus promise. This is currently the dominant psychology driving bullion.

Shine Spreading Beyond the Yellow Metal

Is the sentiment that has lifted gold spilling over into its peers?

• Silver, considered as gold's more volatile cousin, has maintained its ground amidst the currency fluctuations.
• Platinum has also participated in the modest rally.
• Palladium has faced a slight downward pressure due to specific supply-demand dynamics in the automotive sector.

Thus, the industrial metals are still facing headwinds from the slowing global manufacturing outlook. The anticipated reduction in yield can diminish the penalty of holding non-interest-bearing assets like bullion. Furthermore, the inverse velocity between the greenback and gold is highlighting the classic flight-to-quality mechanism often observed during transitional monetary cycles.

Source

Economic Times
Business Times