Gold, which has hit a record high of over $2,500 an ounce, looks set to continue its rally for a longer period. This optimism comes amid the Federal Reserve’s readiness to cut interest rates, in addition to the return of traditional factors that drive gold prices, such as lower yields and the return of Western investors.
In this context, a strategist, who recently bought long-term options on gold for the first time in years, stated: “The speech by Fed Chairman Jerome Powell in Jackson Hole, which included promises to cut interest rates, was a decisive turning point for bullion.”
This year, bullion has shown amazing performance in the markets, achieving record numbers that made the precious metal one of the strongest performing raw materials. The rise in gold in the first half was driven by strong buying by central banks in addition to Asian purchases, which offset the negative impact of the rise in the US dollar, the increase in Treasury yields, and the withdrawal of investments from bullion-backed ETFs. These three factors may now return to support gold positively.
“The opportunity cost of holding gold is falling,” said the global macro portfolio manager at an asset management firm. “This very rapid decline in real yields, coupled with a weaker dollar overall, makes me bullish on gold as an alternative asset to sell the dollar.”
So far in 2024, spot gold has gained more than 20%, with banks forecasting prices could hit $2,700 an ounce since April. Following Powell’s Jackson Hole guidance on Friday, the 10-year U.S. real yield fell to its lowest since December, benefiting non-interest-bearing gold.
Gold prices vulnerable to weak consumption
In another context, hedge funds and speculators have added bullish bets on the Comex, where net long bullion positions hit their highest in more than four years, according to data from the Commodity Futures Trading Commission. Demand for gold-backed exchange-traded funds has also been picking up. Holdings in the SPDR Gold Fund, the world’s largest gold-backed exchange-traded fund, have expanded for eight straight weeks, the longest stretch of inflows since mid-2020.
However, gold prices may be vulnerable to weaker consumption in Asia, where rising prices have weighed on demand. In addition, China’s central bank recently halted its monthly purchases, weakening two of the factors that helped lift gold prices during the first half of the year.
For now, it sees ETF inflows expanding “significantly” over the next six to 12 months. This demand is being bolstered by looser monetary policy, as well as a potential increase in volatility due to recession risks. The bank forecast in a note ahead of Powell’s speech that gold could hit $3,000 by mid-2025. Spot bullion is currently hovering around $2,525, near its peak. For its part, it expected prices to reach $2,600 in the fourth quarter of 2024. He also indicated that the market could witness large inflows into exchange-traded funds, in addition to continued demand from speculators, especially when the Federal Reserve begins to cut interest rates for the first time. Wayne Gordon, a commodity strategist, commented that rising geopolitical risks would also boost demand for safe havens such as gold in investment portfolios.
Jerome Powell and interest rate cuts
Jerome Powell on Friday backed the timing of interest rate cuts, suggesting that any further slowdown in the labor market would be unwelcome. Speaking at the annual Jackson Hole forum, Powell said: “The time has come to adjust policy. The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolution of expectations, and the balance of risks.
” The dollar held near a 13-month low, making gold cheaper for holders of other currencies, while 10-year Treasury yields also fell. “Gold will remain attractive to investors as long as the dollar remains weak ahead of the expected rate cut,” said Tim Waterer, senior market analyst at Investing Saudi Arabia.
“If U.S. yields remain low, gold could rally to $2,550 this week if the $2,530 resistance level is cleared first.” Traders were expecting a full rate cut next month, with a 62% chance of a 25 basis point cut and a 38% chance of a larger 50 basis point cut, according to the Investing Saudi Arabia U.S. Rate Watch tool. The low interest rate environment is boosting the appeal of non-yielding gold. In another development, Peruvian gold exports to India are expected to rise 36% to a record $3 billion in 2024, driven by growing demand from the world’s second-largest consumer, a senior official said on Friday.
Gold prices extended gains on Friday, driven by a weaker US dollar and Treasury yields, after Federal Reserve Chairman Jerome Powell signaled that the current tightening cycle is nearing an end. By the close of markets, December gold futures were up 1.2%, or $29.6, at $2,546.30 an ounce. Gold was up 0.35% for the week, extending its rally to a fourth straight week.
