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Gold Hits New High as Investors Seek Hedge against Stubborn Inflation

The comments below are an edited and abridged synopsis of an article by Harry Dempsey, In London, Financial Times

Gold soared to unprecedented levels last week in response to indications that the US Federal Reserve plans to implement interest rate cuts later this year, despite persistent inflation concerns. The surge, which saw gold touch $2,295 per troy ounce, represents a 15% increase since mid-February and has been fueled by geopolitical tensions in the Middle East.

Gold Hits New High as Investors Seek Hedge against Stubborn Inflation
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Two Fed officials suggested that three interest rate cuts this year would be appropriate, signaling a dovish stance even as the US economy continues to show strength. This sentiment, coupled with rising inflation, has prompted investors to seek refuge in gold, traditionally seen as a hedge against inflation due to its lack of yield compared to other assets.

Analysts point to expectations of declining real interest rates as a primary driver behind the bullish outlook on gold. If the Fed maintains its accommodative stance, there is potential for further declines in real rates, especially if inflation exceeds expectations.

The recent surge in goldis also attributed to concerns about high US debt levels and the upcoming presidential election, with investors viewing gold as a safe-haven asset amid uncertainty. Additionally, increased demand from central banks and Chinese consumers, along with speculative trading activity, has contributed to the rally.

Israeli strikes on an Iranian consulate in Syria have further bolstered gold’s appeal as a safe-haven asset, driving speculative traders to push the price higher. However, despite the surge, gold remains significantly below its inflation-adjusted all-time high from 1980, which equates to over $3,000 per troy ounce.

Some analysts caution that the rapid increase in gold, from $1,800 per troy ounce six months ago, may be overdone. There is a risk that central banks, including the Fed, could delay interest rate cuts due to strong economic performance, which could weigh on gold in the near term. Nevertheless, gold appears to respond positively to various market developments, suggesting ongoing investor interest in the precious metal.