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Gold prices are up more than 7% this month, set for their best monthly gain since October last year, after hitting a fresh record high last week. However, the increase in prices following the Federal Reserve's dovish outlook on interest rates, remains a mystery for Commerzbank.
It is difficult to find a convincing explanation for this rise, says Commerzbank's head of commodity research Thu Lan Nguyen.
On the day, spot gold (XAUUSD:CUR) was up +0.65% to $2,208.28 an ounce, set for a 1.4% weekly rise, and 7.30% monthly gain.
While expectations of U.S. interest rate cuts starting June rose somewhat in the first half of March, those expectations have receded somewhat, Nguyen said in a note dated March 27.
Surprisingly strong U.S. inflation figures in January and February suggest that the decline in inflation has stalled. Against this background, members of the Federal Open Market Committee slightly raised their interest rate expectations for 2025 at their most recent meeting. "However, some market participants had apparently expected that fewer interest rate cuts would be signalled for this year as well, which is why gold actually rose after the meeting," Commerzbank Research said.
Commerzbank gold price forecast in USD per troy ounce, quarter end level:
Meanwhile, central banks have consistently increased their purchase of gold, particularly top consumer China, which is also often cited as an explanation for the price rise since the beginning of the month, brokerage however argues that, it still does not justify the strong gold price.
"After all, the PBoC's purchases of nearly 400 thousand ounces in February amounted to just 5% of the central bank's total purchases in 2023," Thu Lan Nguyen writes, adding, even the popular explanation for gold prices rising due to tensions in the Red Sea as well as in the war in Ukraine, "cannot adequately" explain the ascent either.
Brokerage concludes that, while it is unlikely that prices will fall back to the levels seen at the end of February as the Fed is expected to cut interest rates from June, which should support gold, further upside potential is likely to be limited in the medium to long term.