Spot gold rose by about 0.7% to $4,168.89; December US futures gold increased by about 1% to $4,196.90. Despite long-term borrowing costs remaining near decades-highs, this upward trend highlights investors' strong reaction to expected changes in the Federal Reserve's policy and the ongoing demand for physical gold bars.
This rise comes after a difficult September. Last month, gold prices fell by 6.6%, despite the fact that gold ETF saw a large influx of capital.
The probability of the Federal Reserve raising interest rates has rapidly declined.
The direct catalytic factor is monetary policy.
Weak employment data in September, as well as the subsequent revision downward of non-farm payroll figures, have significantly reduced market expectations for another interest rate hike by the Federal Reserve this month. Currently, the market believes that the probability of a rate hike in October is only about 21%, which is lower than the approximately 70% before the release of the employment data.
This is very important because gold does not generate interest. Rising interest rates usually increase the opportunity cost of holding gold bars, which is also why the upward trend in gold prices has been repeatedly limited recently when the yield on U.S. Treasury bonds exceeded 5%.
However, the pressure has not dissipated. The US dollar remains strong, and long-term yields are still at high levels, which means that if inflation rises unexpectedly again, selling off may soon occur once more.
Record-breaking ETF positions provide support
On the other hand, there is an exceptionally strong demand for investment.
Global physical gold ETF recently reached a record 4,189 tons, following an inflow of about $18 billion in August. The People's Bank of China also increased its holdings by 20.2 tons that month, continuing its buying spree for the 22nd consecutive month.
The combination of ETF demand and central bank gold purchases is helping to alleviate the pressure brought about by high interest rates on gold.
This underlying change may have structural significance. Gold currently accounts for about 27% of global official reserves, surpassing U.S. Treasury bonds, reflecting that central banks around the world are accelerating their diversification away from dependence on dollar-denominated assets. The shift in reserve composition has weakened the traditional inverse relationship between gold bars and bond yields.
$4,000 remains a key support level.
Morgan Stanley recently regards $4,000 as an important support level, with reasons including strong physical buying, the potential for bond yields to eventually decline, and a drop in energy prices. The bank's outlook for gold suggests that if prices approach this level, buying could return strongly.
