Gold retreats from record high levels as Fed pivot bets seen as overdone

Gold retreated from its record high as the US dollar and bond yields advanced amid signs that traders’ aggressive pricing of Federal Reserve rate cuts may have gone too far.

Bullion fell as much as 2.5% Monday in New York trading after leaping by more than 3% in Asia trading to hit a record $2,135.39 an ounce, surpassing the previous all-time high set in August 2020.

Gold’s rally to a record had been turbocharged by Fed Chair Jerome Powell’s Friday comments that traders interpreted as signaling a pivot toward rate cuts, spurring a plunge in greenback and Treasury yields.

Those bets on Fed cuts are now being seen by the market as overdone, with Goldman Sachs calling the level of easing priced in by financial markets “excessive”. Such views coincided with Monday’s gains in bond yields and the dollar.

The yellow metal typically has an inverse relationship with bond yields, falling as rising interest rates offer a more appealing alternative to gold, which pays no interest, and rising as they fall.

“It’s probably premature to say the Fed is pivoting and that we’ll have a continuous decline along the yield curve,” Bart Melek, global head of commodity strategy at TD Securities, said in a BNN Bloomberg interview. “Given all the economic data, it’s not all certain that the Fed is ready to pull the trigger and lower rates just yet.”

Melek said “buying exhaustion” was hitting the precious metal after the record high.

Some analysts argued that gold’s surge to a fresh record was overplayed, and prices slid Monday to as low as $2,020.20 an ounce in New York. Early Monday’s sharp downward move looks like it was “more driven by stop-loss orders,” said Kelvin Wong, a senior market analyst at Oanda Asia Pacific Pte Ltd., who warned of a risk of a short-term pullback.

Bullion’s strength has been underpinned by a wider array of factors, from a wave of purchases by governments and central banks to geopolitical uncertainty, with 41% of the world’s population due to go to the polls next year.

Gold “is the answer for many things at the moment – whether it’s inflation carrying on, rate cuts or the uncertainty with very costly wars going on,” said Jo Harmendjian, portfolio manager at Tiberius Group AG.

Gold has risen more than 600% since the turn of the millennium, though adjusted for inflation it remains below the high of $850 touched in January 1980, which would be equivalent to more than $3,000 in today’s dollars.

The yellow metal typically has an inverse relationship with bond yields, falling as rising interest rates offer a more appealing alternative to gold, which pays no interest, and rising as they fall.

It has gained more than 10% since early October, as Treasury yields and the dollar have fallen amid growing expectations for US rate cuts. Swaps markets now see a more than 50% chance of a reduction in March and are pricing in a cut in May.

Investors will be on the lookout for a slew of key jobs readings over the next few days for clues on the Fed’s next steps.

Many investors have remained on the sidelines as gold surged higher, raising the possibility of further rallies as latecomers look to buy. Investors in gold via exchange-traded funds, a key driver of previous bull markets in the metal, have been sellers for much of this year, with holdings down by more than a fifth from a high in 2020.

The gold-backed ETFs — a key pillar in the metal’s last rally in the midst of the pandemic — experienced five straight sessions of selling last week even as hedge funds and money managers boosted their bullish bets to a six-month high.

“Market positioning is light versus previous times that prices tested these levels,” Wayne Gordon and Giovanni Staunovo, UBS Group AG strategists, said in a note. “To see even higher prices from this high base, investment demand needs to increase in the form of greater ETF purchases.”