Why conditions are ripe for gold prices to hit new highs this year

Impending Fed interest rate cuts, a softer US dollar, geopolitical tensions and central bank buying boost bullion’s appeal

Gold is up more than 21 per cent this year, hitting a record high of $2,531.60 on August 20. Reuters

The US Federal Reserve’s widely-anticipated interest rate cuts, persistent geopolitical uncertainties, a weaker dollar and strong demand from global central banks are cumulatively expected to help gold surpass its previous peaks before the year ends, according to market experts.

The precious metal is up more than 24 per cent this year after hitting a record high of $2,554.5 per ounce at 7:10pm UAE time on Thursday.

“We are witnessing a period where several factors converge to potentially drive gold prices upward. Firstly, the growing expectations of easing monetary policies by the Federal Reserve, anticipated to begin as early as September with one or two rate cuts, could make gold an increasingly attractive investment for holders of other currencies,” says Tony Hallside, chief executive of Dubai-based prime brokerage firm STP Partners.

“Such adjustments in US monetary policy often lessen the opportunity cost of holding non-yielding assets like gold, enhancing its appeal.

“Additionally, the geopolitical tensions in the Middle East continue to underscore gold's status as a safe-haven asset. This environment, coupled with robust buying activity from central banks, has buoyed gold prices throughout 2023 despite the high-interest rate landscape.”

Bullion has dazzled this year, setting a series of records that marked out the precious metal as one of the strongest performers among major commodities. Its ascent in the first half came courtesy of strong central-bank buying plus Asian purchases, which offset the drag from a rising US dollar, higher Treasury yields and outflows from bullion-backed exchange-traded funds.

The macro-economic backdrop indicates that central banks are on course to loosen monetary policies due to softening consumer prices and slowing economic growth. Gold prices are inversely correlated with the value of the US dollar and interest rates.

Gold tends to thrive in a low-interest rate environment as it yields no interest by itself.

Traders have fully priced in a Fed easing for this month, with a 67 per cent chance of a 25-basis-point cut and about 33 per cent chance of a bigger 50-bp reduction, according to the CME FedWatch tool.

Fed Chair Jerome Powell also endorsed an imminent start to rate cuts and expressed confidence that inflation is within reach of the US central bank's 2 per cent target.

Furthermore, safe-haven demand has also bolstered gold prices amid ongoing military conflicts in the Middle East and the war between Ukraine and Russia.

So far in 2024, spot gold has rallied by more than a fifth, with banks including Goldman Sachs saying as far back as April that prices had the scope to hit $2,700 an ounce.

There are also signs of a revival in demand for gold-backed ETFs. Holdings in SPDR Gold Shares have expanded for the eight straight week, the longest run of inflows since mid-2020.

Citigroup sees inflows into ETFs expanding “significantly” over six to 12 months, with demand bolstered by loose monetary policy, as well as a potential increase in volatility amid recessionary risks. Gold may reach $3,000 by mid-2025, the bank said in a note before Mr Powell’s address on August 23.

“Inflation data, particularly the personal consumption expenditure price index, will be closely monitored, as it provides clues on future Fed actions,” according to Mohamed Hashad, chief market strategist at Noor Capital.

“The performance of the US dollar is another critical factor; a weaker dollar makes gold more affordable for holders of other currencies, potentially boosting demand. Lastly, market sentiment and investor behaviour, influenced by broader economic trends and uncertainty, will continue to impact gold prices throughout the year.”

He says the outlook for gold prices this year is cautiously optimistic, with potential for new records.

“While the recent dip in prices, driven by a dollar recovery, has tempered immediate gains, the overall trend remains bullish,” Mr Hashad says.

“Whether it will set a new record depends largely on the interplay between the dollar’s performance, Fed policy and global risk sentiment. If these factors align favourably, gold could surpass its previous peaks before the year ends.”

Connor Woods, analyst at HotToTrade.com, believes that gold prices could easily continue towards $3,000.

He says that the US labour market will drive the price action for gold prices. Any significant weakness in the job market, which is expected, will move traders towards gold as they would expect the Fed to cut rates more aggressively.

The US unemployment rate has risen by 60 basis points since the start of the year – from 3.7 per cent to 4.3 per cent.

A separate report from the US Labour Department on August 21 also showed the US added 818,000 fewer jobs than previously reported last year.

“The path of the least resistance will be to the upside because aggressive rate cuts will bring more weakness in the dollar index, which will be positive for the precious metal,” Mr Woods says.

Meanwhile, Mr Hallside says strong physical demand, particularly from central banks and significant market players like China, is expected to provide long-term support for gold prices.

Notably, the escalating tensions between the US and China could further spur China’s demand for gold, reinforcing its role as a strategic asset, he adds.

These dynamics collectively suggest a favourable outlook for gold this year, and while predicting exact price levels is inherently challenging, the conditions are ripe for gold to potentially test new highs, he says.

Laith Khalaf, head of investment analysis at investment platform AJ Bell, says gold has made good on its promise as an inflationary hedge over the last three years, carving out a healthy real return for investors. That’s despite rising interest rates, which should, in theory, take the shine off the precious metal.

“It’s actually been central banks behind the buying action, with gold ETFs seeing a number of years of outflows. ETF redemptions may be a result of investors getting lured by cash, and bond yields now don’t start with a zero,” he says.

“Meanwhile, central banks have been attracted to gold because it’s liquid, carries no credit risk and is free from any geopolitical interference.”

Mr Khalaf adds that gold remains worthy of consideration as a portfolio diversifier, but it should not make up more than 5 per cent to 10 per cent of an investor’s portfolio at most.

While gold is known as a safe haven, it is volatile and despite having a reputation of being an inflation hedge, it has endured long periods of below-inflation returns, he warns.