Gold prices remain at historic highs as Fed initiates loose monetary policy

The gold market has seen a remarkable rally, with prices soaring to unprecedented heights in recent days. On Tuesday, gold futures for the most widely traded December contract closed at a record high of $2,552.10 an ounce, up $9.50 from the previous session. Despite a slight decline of $1.90 on Wednesday, gold is holding firmly above the key support level of $2,520, suggesting the metal has found stable footing at these lofty highs.

This historic rise in gold prices has been fueled by growing optimism that the Federal Reserve is about to embark on a new cycle of interest rate cuts. The release of the minutes of the Fed's July 30-31 meeting revealed that an “overwhelming majority” of policymakers believe it would likely be appropriate to ease monetary policy at its next meeting in September. This impending dovish shift by the central bank has put significant downward pressure on the US dollar, which has fallen by almost 5% since late June.

As the dollar has weakened, gold's appeal as a safe haven and store of value has only grown. CME's FedWatch tool currently projects a 64.5% probability that the Fed will cut rates by 25 basis points in September, with a 35.5% probability of an even more aggressive 50 basis point cut. The consensus among economists surveyed by Reuters News is that the Fed will cut rates by 25 basis points at each of its three remaining policy meetings this year.

The reason for the increased demand for gold is not only the prospect of looser monetary policy, but also the continued accumulation of the yellow metal by central banks around the world. Gold holdings by central banks around the world have increased as institutions seek to diversify their reserves and hedge against economic uncertainty.

Retail investors have also shown a growing interest in gold, further driving up the price of the metal. The combination of these factors has created a self-reinforcing cycle of ever-increasing and stable demand, underpinning gold's historic rise.

The path of least resistance for gold seems to be clearly up going forward, barring any unexpected changes in the Fed's monetary policy. With the Fed widely expected to begin a rate-cutting cycle in the coming months, the stage is set for a continuation of gold's remarkable rally.

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