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Gold’s Rising Tide: Global Rate Peaks Signal a Shift

EDITOR'S NOTES

The latest developments reveal that global interest rates have peaked, creating a favorable environment for gold. As the Bank of Canada and the European Central Bank lower their rates independently of the Federal Reserve, the precious metal stands to gain. This strategic shift highlights the growing divergence in monetary policies and signals a potential upheaval in financial markets. With gold poised for a resurgence, the stability of the global economic landscape hangs in the balance, casting uncertainty on the future of traditional currencies.

Although the Federal Reserve could still lower interest rates one or two times this year, it continues to signal that it is not in a hurry to adjust its monetary policy just yet.

However, analysts note that despite the U.S.’s reluctance to ease interest rates, the gold market remains well supported as global rates start to fall. The diverging monetary policies in the global marketplace are being driven by the Bank of Canada and the European Central Bank, both of which have cut interest rates due to easing inflation pressures in their respective economies.

Analysts have said that while the Federal Reserve remains the most significant driver for gold, the fact that global rates have peaked should provide some support for the precious metal. Despite the Federal Reserve’s stance to hold rates at restrictive levels, gold has held critical support at $2,300 an ounce.

According to the latest comments from the Bank of Canada and Germany’s Bundesbank, a member of the ECB, investors can expect to see further divergence in global monetary policies that could support gold prices.

Speaking at the 30th annual Conference of Montreal by the International Economic Forum of the Americas, BoC Governor Tiff Macklem provided the most explicit monetary policy outlook.

“If the economy evolves broadly in line with our own forecast, if inflation continues to ease, it is reasonable to expect further interest rate cuts,” he said.

However, Macklem added that while interest rates have room to move lower, they will still be higher than they were before the pandemic.

“Global interest rates are probably not returning to pre-pandemic levels. The new normal won’t be the old normal. And if we’re not going back, well, we all have to adjust,” he said.

Bundesbank President Dr. Joachim Nagel was less explicit in his monetary outlook. He reiterated the ECB’s stance that it remains data-dependent and that decisions will be made meeting by meeting.

However, he provided markets with some optimism that the central bank expects inflation to be under control.

“In this uncertain world, we have to be very cautious, not showing any complacency in our mandate to fight against inflation,” he said. “I have once described inflation as a greedy beast. We are in a situation where we have tamed this greedy beast, but our task is not done.”

Although the ECB has tempered further rate cut expectations, markets are pricing in two rate cuts this year. In Canada, markets are expecting to see three rate cuts by year-end.

Talking about the divergence in global interest rates, Macklem said that so far, the market has been able to absorb this difference. While there is a limit to how much the Bank of Canada can do without the Federal Reserve, Macklem said they are not there yet.

Nagel said that given the different inflationary environments, it makes sense for the ECB to cut rates before the Federal Reserve, something that has never happened before.

This article originally appeared on Kitco News

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