When will the heavy profit taking in gold set off a price correction? As gold nears $2,350 an ounce, that's what investors and shoppers are waiting for. Image Credit: Shutterstock

Gold continues its ascent, shattering more price records and easily surpassing the psychologically significant $2,300 mark per ounce. Today, it’s at $2,364 an ounce.

This surge is fuelled by investor expectations of a rate cut by the Federal Reserve later this year. The Fed chair Jerome Powell's comments last week indicating a potential decline in borrowing costs fuelled investor optimism. While acknowledging higher-than-expected inflation figures, Powell downplayed their impact on the overall picture.

The Fed signalled that US policymakers might wait for clearer signs of subsiding inflation before taking action. Despite the wait-and-see approach, the prospect of lower interest rates remains a positive force for non-interest-bearing assets like gold.

Sustained demand from central banks

Beyond market expectations, gold has enjoyed a rally since mid-February, setting a record each day of the week. While the impending pivot of Fed on rate cuts fuels the current gold surge, other factors contribute to its strength.

Geopolitical tensions and central bank buying sprees act as additional pillars of support. Central bank purchases of gold during 2022 and 2023, have exceeded 1000 tonnes per annum in comparison to a mere 450 tonne per annum purchase in 2021. The World Gold Council reported continued central bank accumulation, with net purchases of 19 tons in February, marking their ninth consecutive month of adding to their gold reserves.

China spearheaded these purchases, followed by India and Kazakhstan.

Gold ETF holdings plummet

Despite the positive outlook from potential rate cuts, the recent often-outsized gains over the past month in gold raise eyebrows. The significant price jumps lack a clear driver, even with strong investor interest in the bullion market. Interestingly, this enthusiasm hasn't translated to physically-backed gold ETFs.

In fact, holdings in these funds have shrunk by over 100 tons year-to-date, reaching their lowest point since September 2019. Gold’s record run has yet to attract investors who favour exposure to the metal through exchange-traded-funds.

US dollar dynamic

The surge in gold was fuelled by a weakening US dollar (even though the greenback is treading its way back). In March, the US reported stronger-than-anticipated private sector job growth, with 184,000 jobs added, surpassing both the expected 148,000 and February's 155,000, suggesting a robust labor market supportive of the US dollar.

However, there was a decline in service sector activity, as noted by S&P Global, with the Services PMI dropping from 52.3 to 51.7 and the Composite Index decreasing from 52.5 to 52.1. Additionally, the ISM's Non-Manufacturing PMI fell to 51.4, below the anticipated 52.7 and the previous 52.6, signaling a slowdown in service sector expansion.

These indicators of decreased business activity have restrained the US dollar's recovery. Investors are eagerly awaiting further insights into the US economy's condition and the potential trajectory of monetary policy.