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Gold future prices closed at a record high level on Friday with renewed hope that the Federal Reserve will begin easing off interest rates sooner rather than later.

Gold for April delivery rose by $41 on Friday, a 2 percent gain, settling at $2095.70. That was a record close for the most actively traded contract.

Gold futures hit an intraday high of $2096.40, below the all-time record of $2,152.30 set on Dec. 4.

The spot price of gold blew through the resistance level at $2,050 per ounce and pushed above $2,090, testing the $2,100 level. The record spot price for gold is $2,135 an ounce set in early December 2023.

Silver also rallied on Friday, with the spot price reclaiming the $23 per ounce level.

Gold prices climbed a wall of hope as data released Friday could push the Fed to begin lowering interest rates.
 

Factors Driving Gold and Silver Bulls

On Thursday, the Bureau of Economic Analysts reported the January Personal Consumption Expenditures Price Index (PCE) rose 2.4 percent on an annual basis, down from December's 2.6 percent. On a monthly basis, PCE was up 0.3 percent and the core PCE rose by 0.4 percent. Both of these numbers were higher than December’s readings, but that failed to raise concern because they were in line with expectations.

The PCE is the Federal Reserve's favorite price inflation indicator because it tends to understate price inflation the most. With no surprises in the January report and the headline number settling close to the Fed’s mythical 2 percent target, the report renewed hope that the central bank will start easing interest rates earlier this year. Hotter-than-expected CPI data dashed those hopes in February, driving gold lower to test the $2,000 level.

On Friday, the Institute for Supply Management’s index of manufacturers plunged to 47.8 percent in February, down from 49.1 in January. The consensus was for the ISM index to rise slightly to 49.5 percent.

The unexpected drop in the ISM index reveals weakness in the economy, and it further stoked optimism about interest rate cuts.

Dollar weakness provided additional tailwinds for gold and silver on Friday.

The gold and silver rallies on Friday followed a pattern we’ve seen over the last couple of years. Any indication that price inflation is cooling, or the economy is weakening, has been bullish for gold. The hope is a victory over inflation will allow the Fed to cut interest rates. Since gold is a non-yielding asset, most people consider a higher interest rate environment negative for gold.

But the mainstream seems to be totally ignoring the reality of price inflation. Despite the PCE, price inflation is far from beaten. The CPI trend has been hotter; and more significantly, the Fed hasn’t done enough to put inflation in its grave. While a 5.5 percent interest rate is high for an economy loaded up with debt, it isn’t high in the face of a 6 percent CPI (using a more honest 1970s formula).

Nevertheless, almost everybody remains convinced that the Fed has got this. They remain confident that the Fed will give them back their easy money soon and that will float the economy to the much-anticipated soft landing.

And ironically, the markets are desperate for the Fed to declare a win over inflation so it can go back to the inflationary policies that caused prices to spike, to begin with.  Rising prices are a symptom of monetary inflation. And monetary inflation is exactly what we will get when the central bank reverts to a looser monetary policy.

So, this bull run in both gold and silver is justified. In fact, both are arguably underpriced given the fact that the economy is hopelessly addicted to inflation. The bubble economy needs easy money to run. That’s why the mainstream desperately wants it back. Since gold and silver both serve as inflation hedges, prices should arguably be much higher. This is especially true of silver, which appears underpriced based on supply and demand dynamics alone.

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