The yellow metal settled back a bit during the European session on Monday after reaching a new peak of $2,631 earlier , as markets remain focused on the increasing likelihood of the Federal Reserve cutting rates.
At the same time, instability in the Middle East is boosting appetite for gold.
For this reason, potential Fed rate cuts serve as catalysts for gold, reducing the opportunity cost of holding an asset that does not pay interest.
Hedging involves protecting business cash against negative changes like inflation or currency depreciation.
Gold helps safeguard against instability in governance, a common occurrence in less developed markets.
JP Morgan noted in a research report that various factors, including growing geopolitical risks, the outlook for interest rates, concerns about the budget deficit, inflation hedging, and central bank purchases, have contributed to the sustained rise in gold prices in 2024.
Expectations that the Federal Reserve would lower interest rates up to three times in 2024, as persistent inflation began to diminish, contributed to gold’s explosive growth this year. However, current estimates indicate that only one rate reduction is planned for the remainder of 2024.
Central banks have increased their appetite for gold. Demand for gold has primarily been driven by central banks, as nations like China, Turkey, and India seek to diversify their reserves away from the US dollar—particularly in light of the West’s decision to freeze Russia’s dollar assets following its invasion of Ukraine.
JPMorgan estimates that central banks bought over a thousand metric tons of gold last year. The People’s Bank of China embarked on its longest-ever buying spree, an 18-month period of purchases that concluded in May. Additionally, India’s central bank increased its gold holdings in June by the largest amount in nearly two years.
According to the World Gold Council’s Q2 2024 report, global gold demand rose 4% year over year to 1,258 tons, marking the highest second quarter in our data period. Healthy over-the-counter sales, up a noteworthy 53% year over year at 329 tons, supported overall demand.
Market fundamentals indicate that gold prices are being driven by a slowdown in ETF outflows, increased OTC demand, and ongoing central bank purchases. Global gold holdings by central banks and government institutions rose by 183 tons, reflecting a 6% year-over-year growth despite a slowdown from the previous quarter.
The World Gold Council’s annual central bank poll revealed that reserve managers anticipate an increase in gold allocations over the next year due to the need for portfolio diversification and protection in a complex economic and geopolitical landscape.
A Relatively Weak Dollar Supports Gold’s Bottom Line
A declining US dollar and lower US interest rates have historically made non-yielding bullion more appealing. Commerzbank Research has increased its gold forecast, projecting three rate cuts by the end of this year and three more in the first half of 2025 by the Federal Reserve—two more than initially projected.
Investors often prefer exposure to riskier assets like corporate bonds and stocks over defensive assets like cash, government bonds, and gold, which is why risk appetite and gold are inversely related. Although concerns about a recession subsided over the past week following the release of a disappointing payroll report, recent data has indicated weakness in key sectors like homebuilding, which could support a more aggressive Fed rate reduction.
When long-term rates appear less promising, yield-producing assets such as bonds tend to lose their appeal, creating an environment where gold typically rallies.
