Strong upward momentum in gold prices could drive the commodity to new highs of around $2,700 by December, bolstered by the US Federal Reserve’s rate cuts starting this week.
The metal has surged throughout 2024, driven by a weaker US dollar, ongoing geopolitical tensions, increased central bank interest, and the anticipated interest rate cuts.
Prices soared to some US$2,590 on Monday, rising 3.8 per cent from US$2,494 just a week earlier as the US Fed meeting edged closer.
In a recent market note, ANZ commodity strategists noted that the bullish sentiment was fuelled by weak US macroeconomic data, which heightened expectations that the Fed will initiate its easing cycle with a 50 basis point rate cut at its upcoming meeting on 17–18 September.
As of Tuesday, markets are pricing in a 62 per cent chance of a 50 bps cut, up from 30 per cent a week prior, according to CME FedWatch, which forecasts interest rate movements based on futures trading data.
While the commencement of rate cuts in the US is tipped to support gold prices, the intensity of its rise depends on the pace of rate cuts in the short term, ANZ’s strategists, Soni Kumari and Daniel Hynes, said.
“Falling real rates and a weakening USD will likely strengthen the inverse relationship they have with gold during the upcoming easing cycle. This will boost investment demand as the opportunity cost of hold gold declines,” the pair said.
“We expect recovery in strategic investments in gold will push prices higher. A 100 bp cut could see 200–250 tonnes (t) of exchange-traded funds (ETF) net flows over the coming months.”
Macroeconomic and geopolitical concerns, the US elections and a likely increase in equity market volatility also make a compelling case for increasing investments in gold, Kumari and Hynes said.
According to their forecasts, gold prices will move towards US$2,700/ounce in the short term and reach a high of US$2,900/ounce by the end of 2025.
Other factors contributing to the rise in gold prices include continued central bank purchases and strong demand for physical gold. In particular, India is expected to drive consumption in the second half of the year as retailers stock up in anticipation of the festive and wedding season.
Boost in ETF flows expected
Looking at the popularity of gold in an ETF wrapper, ANZ’s strategists explained that during each monetary easing cycle, gold prices have historically seen a boost in ETF flows.
For example, during the Global Financial Crisis, net ETF flows surged from 1,400t in early 2009 to 2,500t by late 2012, coinciding with a 170 per cent increase in gold prices from 2007 to 2012. Similarly, in the 2019–20 Fed rate-cutting cycle, net ETF flows reached 1,000t, with holdings peaking at 3,415t in November 2020, and gold prices rising by 33 per cent by the end of that year.
However, recent trends have diverged from this pattern.
Despite a rise in gold prices by over 20 per cent, ETF holdings peaked in late 2020 and then saw a liquidation of nearly 913t. This recent bull run in gold has been atypical, driven more by monetary tightening and strong equity markets rather than positive ETF flows, the strategists said.
“We believe ETF flows will return once the Fed’s easing cycle begins. Flows have turned positive in recent months in all regions,” Kumari and Hynes said.
Should the Fed implement expected rate cuts of 100 basis points, ETF flows could increase by 200 to 250t, and a total of 200 basis points in cuts could potentially boost inflows by 500t, the pair noted.
However, they added that while strategic ETF investments could support a rise in gold prices, speculative positions appear stretched, with shorts nearly covered and longs approaching 2020 levels.
“Crowded positions are likely to be a headwind for the price in the short term.”
