Gold Soars to Record Highs, Institutions Predict $3,000
This year, the price of gold has been rising steadily.
After the Federal Reserve's first interest rate cut took effect, the spot gold price broke through $2,600 on September 20th, setting a new historical high.
Last week, the spot gold closed near $2,622.27, approaching the target price of $2,700 set by several Wall Street investment banks for this year or the first half of next year.
There are also no shortage of institutions calling for $3,000.
For gold, a non-interest-bearing asset, the global central bank's interest rate cuts undoubtedly highlight the value of gold.
In addition, the trend of central banks buying gold is crucial because the Fed's rate cut itself has already been priced in by the market.
For example, the yield on the 10-year U.S. Treasury bonds has long been reduced to about 3.7%, much lower than the federal funds rate (4.75%~5%).
The decoupling of gold prices and interest rates this year has been driven entirely by central banks buying gold.
Although the People's Bank of China has suspended buying gold since May, India's gold imports hit a record high in August, especially after India announced in the joint budget on July 23rd that it would reduce the tariff from the original 15% to 6%, which has driven import demand.
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Currently, investment banks such as UBS and Goldman Sachs have given a target price of $2,700, and more domestic and foreign hedge funds predict that breaking through the $3,000 mark is just a matter of time.
Fawad Razaqzada, a senior analyst at Gain Capital Group, said to the reporter: "Gold broke through the $2,600 mark, and it is expected that there will be some profit-taking in gold soon, but I still have a moderate bullish attitude towards the gold trend for the rest of this year.
Although gold may not reach the milestone of $3,000 this year, due to the expected acceleration of interest rate cuts by the Fed and other major central banks, coupled with ongoing geopolitical tensions and central banks buying gold, I believe this long-term goal is still hopeful.
Geopolitical drivers may be more important than interest rate cuts."
On September 19th, the Fed lowered the federal funds rate range to 4.75% to 5%, the first interest rate cut in four years, and the amount of 50 basis points (BP) exceeded expectations.
Looking at the "dot plot" that predicts the future interest rate path, the median forecast of the Fed's committee for the 2024 interest rate is 4.4%, 0.7 percentage points lower than the June meeting, and the median forecast for the 2025 interest rate was reduced from 4.1% to 3.4%, and the median forecast for the interest rate at the end of 2026 was reduced to 2.9%.
This means that there are still two 25BP interest rate cuts this year, and there may still be a 100BP interest rate cut next year.
After the Fed's interest rate cut decision was announced, gold shot up to $2,600 in the short term, setting a new historical high, but then gave up the increase to fall to around $2,559, and there were obvious signs of speculators taking profits.
However, on the following day, the gold price continued to rise, and last Friday (20th) closed at $2,622.27.
"One of the main factors driving the rise in gold is that the Fed may accelerate interest rate cuts at the beginning of 2025.
Inflation has gradually approached the Fed's target (the Fed expects the core PCE to fall to 2.6% in 2024 and 2.2% in 2025), while the unemployment rate is rising (the Fed has raised the unemployment rate forecast for 2024 and 2025 to 4.4%).
The market currently expects about 100BP of interest rate cuts for the whole year this year, and another 100BP of interest rate cuts next year, but if the economic situation deteriorates faster than expected, the interest rate cut may be larger, thereby weakening bond yields and further enhancing the attractiveness of gold."
Razaqzada told the reporter.
More central banks will follow the Fed's interest rate cuts, including the European Central Bank, the Bank of England, and a series of Asian central banks that have been reluctant to cut interest rates due to the strong dollar.
Yang Ao, the chief analyst of FXTM, said to the reporter of the First Financial Daily that the European Central Bank's previous interest rate hikes were not as aggressive as the Fed's, only up to about 4%, but there may still be 4 to 6 times of interest rate cuts in the future.
However, many institutional investors around the world still have two major doubts about the subsequent rise in gold prices.
The first common doubt is that since 2022, the negative correlation between interest rates and gold prices has been invalid, and the central bank's interest rate hikes in the past two years have not hindered the rise in gold prices.
In response, Goldman Sachs said that structurally higher central bank demand has indeed redefined the relationship between interest rates and price levels after 2022, but changes in interest rates will still lead to changes in gold prices; the second common argument is that the gold market has fully reflected the expectations of the easing cycle.
In response, Goldman Sachs believes that the holdings of physical gold-backed ETFs will gradually increase during the process of the Fed's policy interest rate cuts.
Coincidentally, Juan Carlos Artigas, the head of research at the World Gold Council, said to the reporter of the First Financial Daily that the four major factors driving gold prices are economic expansion levels, risks and uncertainties, opportunity costs (interest rates), and market momentum, and it is necessary to comprehensively assess the four factors.
"In the past two years, gold prices seem to be immune to high interest rates and a strong dollar, and even though interest rates are high, gold prices continue to set new highs, but in fact, they are not completely immune.
High interest rates lead to net outflows of ETFs, and the outflow in the first half of this year is still the highest level since 2013, with significant outflows in Europe and North America, and Asia is the only region that has achieved inflows."
He said that it is just the geopolitical factors that have overshadowed the high interest rate factors, driving gold prices higher.
In fact, because of high interest rates, global funds have been cautious about gold ETFs in the past year, but since the second quarter of this year, as the Fed's interest rate cut expectations have heated up, the flow of ETF funds has already turned.
He mentioned that global physical gold ETFs have been inflow for two consecutive months, with inflows of about $1.4 billion in June, and the inflows in May and June have narrowed the outflow of global gold ETFs to $6.7 billion since the beginning of the year.
Goldman Sachs' model estimates that the trend of ETF holdings increasing due to the decline in policy interest rates will continue for about 6 months.
The increase in ETF holdings has an important impact on gold prices.
Since gold ETFs are fully supported by physical gold, the increase in ETF holdings will reduce the supply of physical gold available in the market (in contrast to "paper gold" that usually does not have physical gold support).
China's gold purchases have slowed down, but India has increased its purchases.
The trend of global central banks buying gold is one of the most critical factors and is also the main reason for the decoupling of gold prices and interest rates in the past two years.
Data shows that global central banks have become net buyers in the past 14 years, and the purchase volume has accelerated in recent years.
In the past decade, the average annual purchase volume was about 500 tons, but it doubled in the past two years, exceeding 1,000 tons.
However, institutions interviewed by reporters believe that the conflict between Russia and Ukraine has been a catalyst for the surge in central bank gold purchases in recent years, with emerging market central banks buying gold at a faster pace, but the pace of purchases in the future will slow down, although the trend of increasing gold positions is difficult to reverse.
For example, in May and June, the People's Bank of China stopped buying gold for two consecutive months, and the industry believes that high gold prices may hinder central banks from buying gold.
Razaqzada mentioned that if global inflationary pressures ease further, the demand for central banks to diversify their reserves from fiat currencies may weaken.
However, central banks may prefer to hoard their gold reserves rather than remove them from the balance sheet.
In this regard, Artigas said: "It is difficult to evaluate the behavior of a single central bank, as this is mainly driven by policy goals, but our model shows that the correlation between the trend of central bank gold purchases and gold prices is not strong, and the price elasticity is weak."
He mentioned that in recent years, emerging market central banks have been the main force in buying gold (some developed countries have already had more reserves in the early years), but developed country central banks have also started to act in the past two years.
For example, the central banks of countries such as Singapore, Poland, and the Czech Republic have accelerated gold purchases.
"Although the pace of central bank gold purchases may slow down in the future, we have found that the Central Bank of Turkey sold a large amount of gold last year, and there has been no appearance this year.
Even if global central banks slow down their gold purchases, it is expected that the amount of gold sold will be less."
Artigas said.
It is worth mentioning that the significant reduction in import tariffs has driven India's gold purchases to surge against the trend.
India's trade deficit in August was relatively large (about $30 billion), mainly due to the contribution of gold imports, and the import volume of gold set a record.
Barclays believes that although the market had previously expected an increase in gold imports, the scale (an increase of $7 billion to $10.1 billion per month, setting a historical record) was unexpected.
However, India's gold import volume may have peaked in August, and as the international gold price rose by 3% month-on-month in September, this will suppress the decline in the landed cost of gold.
Geopolitical risks remain the ultimate driver.
The consensus in the industry is that if gold prices continue to rise significantly, especially rapidly, the necessary factor is geopolitical risks, such as ongoing conflicts in the Middle East, Ukraine, and other places, which will continue to maintain the demand for gold as a safe-haven asset, otherwise, relying solely on interest rate cut expectations is difficult to sustain.
"The upcoming U.S. election may also affect gold prices in a more subtle way.
At present, it is possible that the current U.S. Vice President Harris will win the election and work with a divided Congress.
Compared with the Trump era, this situation may bring a more stable political environment.
However, Harris's victory may weaken the dollar, which is indirectly beneficial to gold."
Razaqzada told the reporter.
There are many uncertainties at the policy level.
For gold prices, changes in bond yields have a significant impact.
Stephen Dover, the global chief market strategist of Franklin Templeton, believes that the main drivers of U.S. Treasury returns will be the business cycle (growth and inflation) and central banks, rather than fiscal policy or sovereign risk premiums.
No matter how reasonable the long-term worries about the U.S. government deficit are, there is no evidence that the current scale of debt or its expected growth will have a significant short-term or medium-term impact on the level or directional changes in the U.S. Treasury market.The fluctuations in risk assets will also affect gold, a safe-haven asset.
Dover believes that for the stock market, valuations and profits determine returns.
Increasing the corporate income tax rate (Harris advocates raising it from 21% to 28%) would reduce after-tax corporate profits, but if the Republicans control the Senate, it may be difficult for her as president to implement any increases.
At the same time, uncertainties in the dollar and capital markets could be the imposition of large-scale, universal tariffs following a Trump victory, but if other countries retaliate, the risk of a trade war could push up the risk premium, leading to a sharp decline in the stock market and causing investments to flood into traditional safe-haven currencies (Swiss Franc, Japanese Yen) or gold and cryptocurrencies.
Lazarada believes: "Technically, the price of gold is still in a strong uptrend, so it's hard to predict how much higher the price of gold can rise.
However, momentum indicators such as the RSI show an overbought condition, so one should be alert for signs of profit-taking and short-term corrections.
This is important because gold is at a historical high, with the next significant target at $2,700, especially after breaking through the $2,600 level.
Key support levels to the downside include $2,600, followed by $2,530, and finally $2,500."
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