The asset has been trading above US$2,300/oz for most of the second quarter and has outpaced most major asset classes, including emerging market stocks, commodities, and US cash in the first half of 2024.
According to new analysis by the World Gold Council (WGC), consensus suggests gold’s gains will stand at some 10 per cent for the full year with falling rates in developed markets expected to maintain current growth levels alongside continued support from global investors.
“Given that gold is already up by more than 10 per cent and consensus suggests a similar result for the full year, it reiterates that gold – supported by contributions from other sectors – can perform well even when rates remain as expected,” it said in its mid-year outlook.
While a “rangebound” performance is widely expected, the WGC also noted that gold could, in fact, go on to outperform with increased flows from Western investors, who have so far been “a missing part of the puzzle”.
The WGC noted that while investors have been active – as denoted by high-market volumes – retail investment demand has been low and gold ETFs have seen net outflows year to date.
“Gold’s strong performance despite the absence of strong Western flows, suggests that, unlike previous periods when gold broke record highs, the market is still not saturated and could see another leg up,” the council pointed out.
It outlined that demand from this segment of the market could be triggered from three key sources, including geopolitics, interest rates, and recession risks.
Delving into interest rates, the council said European gold ETFs have experienced inflows since the European Central Bank cut rates in May.
“A continuation of this trend would provide further support,” the council said.
“And while there’s already a 25 bp cut by the Fed priced-in by the market for later in the year, the actual policy decision would bring reassurance to investors about the direction of rates going forward, thus fostering sustained inflows.”
On geopolitics, the council said the current unease could be seen simply as the new normal or a scenario that is unlikely to abate anytime soon.
“Geopolitical risk is particularly difficult to predict and may come from where it’s least expected. What is true, however, is that gold reacts to geopolitics, adding 2.5 per cent for every 100 points the Geopolitical Risk (GPR) Index moves up,” it said.
Moreover, looking at the boost central banks have provided the asset to date, the WGC said it expects this demand to remain above trend this year. In 2023, central banks contributed at least 10 per cent to gold’s performance and some 5 per cent in the first half of 2024.
The WGC also flagged the possibility of a pullback in gold in the second half in the event that central bank demand drops drastically, rates remain high for longer, and Asian investor sentiment flips.
“Overall, the extent of gold’s reaction upwards or downwards will be a function of the magnitude by which each of the aforementioned factors – or a combination thereof – move,” it observed.
