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Gold Prices Rise Amidst Fed’s Firm Stance on Rates and Middle East Tensions

Gold prices experienced an ascent on Thursday, undeterred by the Federal Reserve’s indication of keeping interest rates higher for an extended period. The safe-haven appeal of gold was bolstered by ongoing conflicts in the Middle East, contributing to the metal’s rise despite the Fed’s stance.

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Spot gold recorded a 0.3% increase, reaching $2,045.21 per ounce, while gold futures expiring in March saw a marginal 0.2% decline, closing at $2,062.40 per ounce. The divergence in the two prices highlighted a heightened near-term demand for physical gold.

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The escalation of a conflict involving U.S.-led forces and the Yemen-based Houthi Group contributed to the safe-haven buying spree, reinforcing gold’s status as a go-to asset during geopolitical uncertainties. The shift in market sentiment, particularly evident in a sharp reversal in stock markets, fueled the demand for gold as investors sought refuge.

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However, gold’s potential gains were limited by a robust rebound in the U.S. dollar, trading near seven-week highs. The dollar’s strength acted as a restraining factor for gold’s further ascent.

Fed’s Hawkish Stance Tempers Gold’s Gains

Federal Reserve Chair Jerome Powell adopted a hawkish stance, emphasizing that it was premature to consider interest rate cuts, especially in March. Powell highlighted the persistent inflationary pressures and the resilience of the U.S. economy, tempering expectations of an imminent rate reduction.

Despite the hawkish rhetoric, Powell left room for potential rate reductions later in the year, acknowledging the evolving economic conditions. This nuanced stance led to increased market bets on a rate cut by May. The CME Fedwatch tool indicated a 63% probability of a 25 basis point cut in the Fed’s May meeting, reflecting the market’s anticipation of policy adjustments.

Goldman Sachs analysts aligned with this outlook, forecasting a May rate cut and maintaining the expectation of a total of five rate cuts in 2024. The prospect of lower lending rates bodes well for gold, as higher rates increase the opportunity cost of holding bullion.

Copper Prices Retreat Amid Mixed China Economic Signals

In contrast to gold, copper prices experienced a retreat on Thursday, with traders capitalizing on profits following a rally to one-month highs in the previous session. Copper futures for March recorded a 0.6% decline, settling at $3.8705 per pound.

The recent rally in copper prices was driven by optimistic sentiments surrounding China, the world’s largest copper importer, implementing additional stimulus measures to support economic recovery. However, January data revealed sustained economic weakness, with manufacturing sector indicators indicating contraction.

China’s property sector crisis, exacerbated by the court-ordered liquidation of beleaguered developer China Evergrande Group, added to concerns, contributing to the mixed economic outlook and impacting copper prices. The combination of positive stimulus measures and underlying economic challenges in China resulted in a nuanced market sentiment towards industrial metals like copper.

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