Gold set for best year in three on hopes for Fed rate cuts

Gold prices were set on Friday for their best year in three, as expectations grew for US interest rate cuts early next year and the war in Ukraine and tensions in the Middle East lifted safe-haven demand.

Spot gold was up 0.2% at $2,069.80 per ounce, as of 0350 GMT. It has risen 14% so far this year, heading for its biggest annual gain since 2020.

US gold futures fell 0.2% to $2,079.10 per ounce.

"Gold prices seem to end the year near current levels, while the main driver next year would be the timing and depth of Fed interest rate cuts," said Ilya Spivak, head of global macro at Tastylive.

Bets for rate cuts from the US Federal Reserve have firmed in the wake of cooler inflation data, with traders now pricing in an 88% chance of monetary policy easing in March, according to the CME FedWatch tool.

'Gold will accelerate higher'

Lower interest rates decrease the opportunity cost of holding non-yielding bullion.

The dollar index edged lower on Friday and was poised for its worst yearly performance in three years, boosting gold's appeal for other currency holders.

Yields on 10-year Treasury notes languished near their lowest level since July at 3.8424%.

Going forward, "refinancing risk is a potent threat to financial stability. If that shakes credit markets and forces the Fed to ramp up stimulus in a hurry, gold will accelerate higher," Spivak said.

Spot silver fell 0.5% to $23.81 per ounce, but looked set to the end the year largely flat.

Platinum rose 0.2% to $1,002.50 per ounce, while palladium was steady at $1,132.90. Both autocatalytic metals were on track for a yearly decline, with palladium down 37% - its biggest since 2008.