Gold is nearing all-time highs, rising 50% from its 2022 low and 25% since mid-February.
According to Morgan Stanley commodity strategists, this increase is mainly driven by the physical market, with central bank purchases doubling in 2022/2023 compared to previous trends. Retail purchases have also increased this year, especially in China, where demand for bars and coins is very high.
Moreover, gold exchange-traded funds (ETFs) have seen continued inflows since late May, especially from Europe following the June interest rate cut. Strategists believe US ETFs are likely to follow suit once interest rate cuts take effect, further supporting gold prices.
“While fears of a US recession are mounting, our economists still see a soft landing with a stronger Fed response as data weakens, which should support gold inflows among investors,” said strategists led by Amy Gower in a note.
“COMEX net long positions are at their highest levels since the second quarter of 2022, but are still 100,000 off all-time highs,” she added.
While the recent rally was driven by physical factors, strategists argue that financial flows will drive the next leg higher. They note that this shift is “beginning to take hold,” predicting that gold prices could reach $2,650/oz in the fourth quarter of 2024.
They said volatility is expected to continue as new U.S. data impacts forecasts on the timing of rate cuts. However, the overall trend for gold is expected to rise.
China’s central bank halted its gold purchases in May after 18 consecutive months, and Indian demand for jewelry has reportedly declined.
In June, gold withdrawals from the Shanghai Gold Exchange fell 31% year-on-year as weak jewelry demand offset strong consumption of bars and coins.
