Gold Monthly View for September 2024

Gold prices have rose sharply hitting an all time high in August of $2,685 an ounce. To put things into perspective, the price of the gold in dollar terms is up over 27.9% year-to-date (YTD), and on a year-over-year scale, the price is up over 42.8%. Gold has made serious gains this month, rising over 5.4%. Broadly, two primary factors have driven gold’s rally: the anticipation of falling interest rates and robust demand from central banks in emerging markets. Additional forces driving gold's historical price rise include escalating geopolitical tensions and prevalent economic uncertainties.

One primary driver behind gold's meteoric rise is the recent recalibration of the Fed’s monetary policy. The central bank implemented a 50-basis point cut to its benchmark interest rate, lowering the federal funds rate to a range of 4.75% to 5.0%. Fed Chair Jerome Powell, announced a reduction in rates after 4 years which came as a no surprise except the larger than anticipated cut. The Fed lowered its median forecast for interest rates going forward as well as its expectations of future economic growth and inflation. The Fed also raised its projections for unemployment. All of this together suggests that the Fed is concerned about growth, but with its 50 bps cut and its lowered interest rate projections was attempting to show the market that it is ready to act aggressively if need be. Any further aggression from the Fed will be positive for gold.

We have seen more weakness in the economic numbers. US ISM Manufacturing numbers failed to print a number that was better than the expectations: actual 47.2 vs. the forecast of 47.6 while the previous reading was at 47.2. The fact that we have not seen any improvement in the US ISM manufacturing number is not really good news for the US economy. Looking at the latest economic indicators, such as consumer spending and consumer confidence, it appears that the US economy is increasingly under stress. This implies that the risks of a hard landing persist, a situation that the Federal Reserve aims to prevent at all costs. The 6.9 points drop in in consumer confidence index was the largest monthly decline in three years. Index internals, including assessments of business and labor conditions, stock prices, interest rates, inflation expectations, and buying plans, registered declines.

Geopolitical tensions have been ongoing for quite some time, and have supported gold prices since last year, even when rising interest rates were posing a headwind. The crises in the Middle East have exacerbated global uncertainty. Gold prices have climbed near recent record highs following Iran's ballistic missile strike on Israel. The dramatic escalation in Middle East tensions has sent shockwaves through global markets, with investors scrambling to assess the potential ramifications for regional stability and international relations. This rapid intensification of hostilities between Iran and Israel has heightened concerns about a potential wider conflict in the already volatile Middle East.

Outlook:

The convergence of factors – falling interest rates, increased central bank demand, geopolitical uncertainties, and gold's historical role in times of risk aversion – creates a compelling case for the metal's continued upward trajectory. As the global economic landscape evolves, gold's allure as both a store of value and effective diversifier against various risks, positions it for potential further gains in the coming months. The interplay between monetary policy, geopolitical developments, and investor sentiment promises to keep the gold market dynamic and potentially volatile in the coming months.

The reality is that the future path of least resistance heavily relies on the Fed's monetary policy. We have seen the ups and downs surrounding rate cuts expectations in the US before which leads to volatility in gold prices and this time is no different. However, the Fed has already embarked on a rate cutting cycle with a mega cut primarily driven by growth concerns and the prevailing high interest costs impacting government balances. This would continue to support gold prices in addition to geopolitical worries capping downsides in gold. Any correction in gold due to volatility in rate expectations which are probably running a tad ahead of expectations, would provide an opportunity for investors to build their gold allocation. Medium term outlook for the precious metal looks promising given the US interest rate cycle has already turned, and confluence of macro-economic factors impacting growth, markets and hence central bank action, supporting gold from here on.

Over the medium term, one of the factors that will adversely impact growth amidst high rates is the burgeoning interest costs on the government and the households. Government debt in the US has surpassed $35 trillion now and shows no signs of reducing over the next few years. The continuing deficits and unsustainable debt will eventually lead to losing confidence in the dollar.

The trend of investments into gold and diversification of reserves continues. We believe this trend is likely to continue this year amid geopolitical uncertainties in middle east, elections in Europe, US and major economies, central bank buying to diversify its reserves and with continued fragmentation in world economy, would continue to support gold prices.

Source: Bloomberg

Above article is authored by Quantum.

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