Gold prices surged to an all-time high as investors placed bets on potential Fed rate cuts

Gold prices set a new record on Monday as a recent inflation report buoyed optimism that the Federal Reserve will cut interest rates in June.

Gold futures on Monday were trading at $2,275, up about $37 or just over 1.6% — the highest price since the contract’s creation in the 1970s. The upward momentum is in large part due to expectations that the Fed may cut interest rates soon, an action that would be expected to boost asset prices.

Driving some of the sentiment about rate cuts is Friday’s report on the personal consumption expenditures index, which is the Fed’s preferred gauge of inflation.

From January to February, inflation rose 0.3%, which was slightly less than expected.

Core PCE inflation, a measure of inflation that strips out volatile energy and food prices, fell slightly to a 2.8% year-over-year rate.

Following the release of the Friday report, Fed Chairman Jerome Powell said it is “good” that the data “is pretty much in line with our expectations.”

“Inflation data, and Powell’s comments in particular, have provided a further boost to gold, with the market becoming increasingly convinced that the Fed will start to cut rates in June,” Warren Patterson, the head of commodities strategy at ING Groep NV, told Bloomberg. He said, though, “it wouldn’t take much of a catalyst to see a pullback in the short term.”

Too-high interest rates could suppress investment and slow demand. That is why investors are hoping for an interest rate cut, as is President Joe Biden.

Biden has been working hard to convince voters that he is a good steward of the economy. Inflation has been coming down, but it remains high by historical standards, and voters have expressed their discontent with the higher prices.

Biden has been highlighting the objectively good metrics of the economy, such as low unemployment and robust gross domestic product growth.

Just a few months ago, investors were optimistic that the Fed was going to cut rates up to six times this year, with the first rate cut coming in March. Higher inflation reports have dashed those hopes, but now investors are hoping that the Fed’s June meeting will be when the long-awaited pivot finally occurs.

Investors are implying a probability of over 61% that the Fed will end up cutting interest rates by the time its June meeting has concluded, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed. But that is a very fluid projection.

The FedWatch tool is pegging about a 1 in 4 chance that the Fed’s rate target will be held at its current level of 5.25% to 5.50%, even after its July meeting.

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Economists from Oxford Economists said in a note that “barring any major downside surprises, we anticipate the Fed will wait for a few more months of data before cutting.”

“We will push back the first rate cut in our forecast to June, though we still anticipate three cuts this year,” the economists said.