Weak American Economic Data Causes Gold to Rise as Rate Cut Expectations Increase

Earlier this month, the price of gold rose as weaker than expected data on the U.S. economy strengthened expectations that the Fed would reduce rates of interest later this year, which sent bond yields and the dollar even lower.

The price of spot gold rose by 0.9% to reach $2,347.10 an ounce. This is after it posted a 2% increase in May, with prices reaching a new high of $2,449.89 towards the end of May. U.S. gold futures also rose by 1% to reach $2,369.30 an ounce.

Latest data shows that manufacturing activity in America slowed for a second month in May, with this being attributed to a decline in new orders. May’s manufacturing purchasing managers index under the Institute for Supply Management dropped to 48.7 from April’s figure. Construction spending also fell unexpectedly in April after a drop in nonresidential activity was recorded. This despite seeing an improvement in single-family home building.

Data from the Commerce Department’s Census Bureau showed that construction spending fell 0.1% after slipping 0.2% in March. Benchmark U.S. Treasury yields declined to a two-week low after weak manufacturing data was posted, while the dollar also dropped to a three-week low against other currencies. This made gold even more attractive for holders of other currencies.

Data from Friday showed that in April, inflation in America stabilized, suggesting that the central bank’s plans to cut interest rates later this year was still set. High Ridge Futures’ director of alternative investments and trading, David Meger, stated that despite some pullback, there were strong expectations that the country is inching closer to reduced interest rates later this year.

Traders speculate that there’s about a 59% likelihood of a rate cut by the Federal Reserve in September. Lower rates of interest reduce the opportunity cost of holding nonyielding bullion.

In other news, the European Central Bank is expected to reduce interest rates to 3.75%. This is based on a poll of economists who forecasted two reductions set for September and December. This move shall make it the first major central bank to reduce rates this cycle.

Investors now wait for U.S. nonfarm payrolls due later this week as well as the ADP employment report.

Palladium also rose by 1.6% to reach $918.6 per ounce while the price of spot silver rose by 0.7% to hit $30.5 an ounce. The price of platinum dropped by 1.9% to reach $1,017.5 per ounce.

As central banks around the world move to cut rates, gold will become more attractive as an investment. As a result, entities such as Royal Gold Inc. (NASDAQ: RGLD) could deliver commendable shareholder value as bullish conditions continue.

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