Gold Rises to Record High on Rate Cut Hopes

Gold (XAU) hit a record high of  $2,531 per ounce on Tuesday, 20 August, driven by a weaker US dollar and expectations that the Federal Reserve will cut interest rates in September following Governor Michelle Bowman's cautious stance.  

The Dollar Index (DX) declined to a seven-month low of 101.85 during the session, which increased demand for the precious metal, as chances of a rate cut next month rose to 71.5%, according to the CME FedWatch Tool.

Analysts at UBS (UBSG.VX) believe gold prices could rise to $2,600 per ounce by the end of 2024 due to economic and political instability and prospects of interest rate cuts by central banks.  The Fed is one of the last central banks to ease, following cuts by the European Central Bank (ECB) and Bank of England (BOE).

Investors will watch the Fed's July meeting minutes due Wednesday,21 August, and Fed Chair Powell's speech at Jackson Hole on Friday for clues about further rate cuts.

Rate Cuts Speculation

The all-time high in gold prices is not a rare phenomenon these days. A weaker dollar and rising geopolitical tensions due to conflicts in the Middle East have boosted demand for gold as a safe-haven asset, with a prior record high only reached last Friday, 16 August. However, the acceleration was primarily attributed to the possibility of the Fed cutting rates 120 basis points in 2024 following a poor jobs report in July. Currently, this has come down to around 100 basis points.

Yet, according to a Reuters poll, some economists expect the Fed to cut interest rates by 25 basis points at each of the remaining three meetings of the year, totalling three rate cuts or 75 basis points and not 100 basis points. They noted resilience in recent economic data, citing retail sales and a still low unemployment rate. Much will depend on how the economic data evolves.

Fed Chair Jerome Powell said a rate reduction could be considered in September if the data supports it, and unemployment has recently increased. However, Governor Michelle Bowman emphasised the need to be patient and allow inflation to fall towards 2% before lowering interest rates in her speech discussing the economic outlook on Tuesday, 20 August. While she did not endorse a rate cut, she did not reiterate her previous calls for further rate hikes, which may have led markets to believe she is changing her stance. (Source: Reuters)

Global Demand Trends

In July 2024, China's gold market saw weak wholesale demand and continued inflows into gold ETFs (GLD), driven by expectations of a Fed rate cut and safe-haven demand. China's gold imports fell sharply also in July 2024, down 24% from the previous year to 44.6 tonnes, due to China's economic slowdown and the central bank pausing its gold buying programme. Overall, central banks reduced holdings in Q2 from 299.9 tones to 183.4 tones. 

However, according to available data from the World Gold Council, demand for the London Bullion Market (LBMA) reached record highs in Q1. LBMA is the largest global over-the-counter (OTC) market for wholesale gold and silver transactions for unallocated gold and silver deliveries in London, followed by the US, Switzerland and Japan’s centres.  Notably, investment also rose from 200.4 tones in Q1 to 253.9 tones in Q2, a 26% increase, suggesting that gold continues to play an important role in asset allocation strategies for global investors. 

Market Outlook

So far in 2024, gold has outperformed most other asset classes, driven by continued central bank buying, investor and consumer demand and geopolitical uncertainty. 

LBMA asked 14 professional analysts in July for their forecast for the price of gold for H2 2024. According to the review, gold prices are expected to set fresh records at an average forecast of $2,547 per ounce in the second half. However, the original full-year projections for H1 in February surpassed the $2,059 target by 7.1%.

However, gold's momentum may weaken unless expected reductions in interest rates in developed markets attract more Western investment flows and demand from global investors looking to hedge risks.

Conclusion

Gold prices hit a record high on the back of a weaker US dollar, geopolitical tensions and expectations of interest rate cuts by central banks as the Fed is expected to cut rates in September following comments suggesting a more dovish stance. 

Gold demand may have been mixed, but investment demand is rising globally, and forecasters expect fresh records in the second half of the year, although momentum may weaken without rate cuts by the Fed.

Investors will watch the Fed's meeting minutes and Chair Powell's speech at Jackson Hole for further clues on whether the Bank leans towards three rate cuts this year due to recent resilience in economic data.