Investment executives have voiced a “constructive” outlook for gold, with some suggesting it could climb to US$2,700 over the next few months, benefiting from interest rate cuts, a weakening US dollar, heightened interest from central banks, and increased market volatility.
Gold prices held out above the US$2,500 level on Tuesday, 20 August, hitting a new high of US$2,531 during the trading session.
Prices have since settled to around US$2,516 as at Wednesday, 21 August.
Since the start of 2024, the commodity is up around 22 per cent.
Reflecting on its recent strong performance, Phillip Hudak, co-portfolio manager for Australian Small Companies at Maple-Brown Abbott, said the price of gold has flourished on the back of an “increased geopolitical risk premium” in conjunction with a material ramp up in central bank net gold purchases, driven primarily by China and Russia.
According to the World Gold Council, central bank net gold buying saw a 6 per cent year-on-year increase in July, at 183 tonnes, which it attributed to “the need for portfolio protection and diversification”.
A month prior, its global survey of 70 central banks also found almost a quarter of them intended to add to their gold reserves within the next year, the highest level observed since the survey began in 2018.
Speaking to InvestorDaily, Hudak explained that gold’s recent rise in popularity has a lot to do with market expectations of impending interest rate cuts.
“We remain constructive on gold given easing interest rate cycles have historically been favourable for the price and have provided material tailwinds in the 12 months following the first cut in previous cycles,” he said.
ANZ senior commodity strategist, Daniel Hynes, also linked gold’s recent rise to anticipated monetary easing as well as the upcoming Jackson Hole symposium where US Federal Reserve chair, Jerome Powell, is expected to lay out a roadmap for US interest rates.
With the view that the Fed’s rate cutting cycle is soon approaching, Hynes last week placed the year-end price target for gold at some US$2,550.
“Interest rate cuts are normally positive for gold as they reduce the opportunity cost of holding gold,” said Hynes in a market note.
“Easing monetary policy and the resultant decline in US Treasury yields and downturn in the USD will be the key drivers of gold demand. So far, gold has been supported by healthy physical demand and central bank purchases fuelled by geopolitical tension. Now, lower interest rates and a weaker USD will add to those drivers.”
Looking back at US easing cycles as far back as 1990, Hynes pointed out that the price of gold has risen 5–6 per cent after the first rate cut.
“On top of this, the US election is likely to see investors hedging against market volatility. So, we expect the gold price to hit a fresh high of US$2,550/oz by the end of this year,” he said.
In conversation with InvestorDaily, State Street Global Advisors’ Asia Pacific gold strategist, Robin Tsui, said strong retail buying from Asian markets in the first half of 2024, alongside strong central bank interest, prompted the fund manager to “re-adjust” its expectations for the second half.
“I think a lot of clients were quite surprised about the strength, us as well, because we didn't expect gold price to hit all-time highs back in April and May. That led us to re-adjust our expectations for the second half,” he explained.
State Street’s base case stood at US$2,200 to US$2,500, which has already been crossed, while its bull case sits within US$2,500 and US$2,700.
“We said that because we did expect rate cut expectations to push up gold prices because of the weaker US dollar,” he told InvestorDaily.
“Once the Fed starts to cut rates, and we have seen the US dollar has been getting weaker as well, we do expect the historical strong interface correlations between the US dollar and gold price will continue to be in play.”
ETFs boosting price of gold
Tsui also believes the growth in gold is associated with its rising popularity in an ETF wrapper.
According to the World Gold Council’s latest outlook, gold ETFs attracted US$3.7 billion in flows last month, marking the third consecutive month of inflows.
In combination with a 4 per cent rise in the gold price over this period, this has helped drive total global gold assets under management (AUM) to a new month-end record of US$246 billion.
Looking at the different regions, the WGC found Australia recorded inflows of some US$26.3 million, “likely fuelled by a strong gold price performance in the depreciating local currency”, to bring total AUM to US$3.2 billion.
“What we’re seeing right now is that the gold ETF flows have been coming back, because in the last couple of years, especially in the first half, we saw quite strong outflows from Europe and also the US, because interest rates were quite high in those regions. But in the last two months, we’ve seen quite a substantial amount of inflows from US and also Euro investors, which have supported gold prices as well,” said Tsui.
“An increase in market volatility and the rate cuts and the weakening US dollar plus the return of gold ETF inflows, those four factors will be quite supportive for our bull case.”
