Prices rose again on Thursday, driven by growing expectations that the Federal Reserve could start cutting rates in September, as well as softer inflation data and dovish hints from the central bank.
It’s clear that the gold rush has gained momentum this week and shows no signs of slowing down. In this article, we look at the key drivers behind the recent gold price rally.
Fed will soon start cutting interest rates
On Monday, Federal Reserve Chairman Jerome Powell expressed increased confidence in falling inflation. Although he did not explicitly mention a rate cut, markets interpreted his comments as a signal that a cut was imminent.
According to CME’s FedWatch tool, there is now a 93.3% chance that the Federal Reserve will lower its target range for the federal funds rate in September to 5% to 5.25%, down from the current 5.25 % to 5.50%.
Moreover, there is a 6.7% chance of a reduction of half a percentage point. The shift follows a 0.1% decline in the June consumer price index, bringing annual inflation down to 3%, the lowest in three years. A month ago, the chance of an interest rate cut in September was about 70%.
Recent data shows US inflation is cooling, with the Consumer Price Index (CPI) unexpectedly falling 0.1%. All this is fueling hopes for monetary easing and could push buyers to buy more gold.
Central bank demand
The Chinese central bank did not expand its gold reserves for the second month in a row, and gold imports to China via Hong Kong fell 38% in April compared to March. The decline to 34.6 tonnes marks a shift from the higher consumption levels in the first quarter.
In India, gold demand remained weak, with dealers offering significant discounts to boost gold purchases. Indian gold has been sold at a discount for ten weeks in a row due to low demand and reduced import duties on gold imported along with platinum.
At the end of 2023, central banks held approximately 37,000 tons of gold, accounting for 16.7% of their total foreign exchange reserves. The largest reserves are held by the United States, Germany, Italy and France.
However, according to UBS strategists, emerging markets, especially Russia and China, are rapidly expanding their gold reserves. The purchase comes amid a broader strategy by central banks to diversify assets and reduce dependence on major currencies such as the US dollar, euro, yen and pound.
Looking ahead, gold demand is receiving solid support from central banks. An additional factor for the coming years could be our prospects for a weaker US dollar. Central banks in emerging markets tend to intervene in the currency markets when their currencies appreciate against the US dollar,” UBS said.
ETFs have also played a major role in the recent rise in gold prices. After bottoming out in May, positions in gold ETFs have started to increase.
“The gold share of ETFs appears to have bottomed out in May and is now starting to rise again. This indicates that a new wave of demand for gold could come through this channel, especially as financial advisors and institutions become more active.” a portfolio manager at Sprott Asset Management was quoted by Reuters.
What are the prospects for the gold price?
Despite positive real interest rates, gold prices have reached record highs, HSBC precious metals analysts noted earlier this week.
“Gold has historically been sensitive to real interest rates, and while there is a notable break in this relationship, we expect real interest rates to weigh on gold through late 2024 and 2025,” they wrote.
While ETFs continue to see outflows, strong buying in the OTC market and by institutional investors has offset this trend. Net long positions on the Chicago Mercantile Exchange (CME) remain elevated, but analysts believe they will not rise much from current levels.
“Market sentiment is clearly bullish, and while the near-term upward trajectory shows no signs of slowing, we believe prices are gradually becoming overextended,” they noted.
HSBC has raised its average gold price expectations for 2024 due to near-term strength. However, the bank expects a potential price drop in the fourth quarter of this year or until 2025.
Specifically, analysts at HSBC have increased their average gold price forecast for 2024 from $2,160/oz to $2,305/oz. However, their 2025 estimates have been lowered from $2,105/oz to $1,980/oz, indicating a significant decline from current levels.
Analysts expect the gold price to recover in 2026, raising their average price projection for that year from $1,880/oz to $2,025/oz.
On the contrary, Citi analysts believe that gold prices could rise to $3,000 per ounce due to significant financial inflows. The bank said a weakening US labor market, disinflation and a soft CPI in June strengthen the case for Federal Reserve easing at the July FOMC meeting.
“This should be bullish for gold and silver through year-end,” Citi noted.
