Over the summer months, gold rose to new all-time highs at levels of around USD 2,685 per oz. The nearly relentless rise in the gold price reflects several factors.
First, US inflation data printed below expectations in two consecutive months, showing that core inflation is currently running at an annualised rate of around 2.4%. The large decline in monthly inflation data shows that contemporaneous inflation pressures are waning. This prompted the US Federal Reserve to start their rate-cutting cycle with a 50 bp cut at its September meeting. It is, however, worth noting there were signs of hawkishness coming from both the median dots and Fed Chair Powell’s press conference. The 2024 Fed dots showed that a large number (nine out of nineteen) forecast one 25 bp rate cut over the remaining two meetings, while the remainder were broadly in the two 25 bp cuts camp. Markets reacted to this by pricing in around 75 bps in additional Federal Reserve rate cuts by December. Several other large central banks also started to cut rates in September, meaning that global rates are now falling; this is fundamentally constructive for gold.
Second, the USD also began to weaken, and since mid-July the US Dollar Index has fallen by around 4%. We note that the USD has underperformed the wider move in market-based interest rates, meaning that it has further scope to fall over the coming months and quarters. This will be constructive for gold, because when the USD depreciates it leads to higher prices, as gold is priced in USD.
We note that central bank gold purchases have fallen since the beginning of June. Central bank purchases of physical gold had averaged around 80 tonnes per month; however, this has since fallen to around 40 tonnes. We think that the rapid rise in gold prices has likely dissuaded central banks from making further large increases to their reserves. However, we think that gold will be well supported on any decline, as central banks look to increase their allocations at lower prices. The wider backdrop remains conducive for further central bank allocations towards the yellow metal – geopolitical tensions and large fiscal deficits will continue to propel gold to higher levels.
In terms of retail and consumer demand, we note that investors have increased their allocations towards gold-focussed ETFs in recent weeks, ending two years of consecutive outflows. We anticipate that ETFs will continue to see significant inflows over the coming months, as investors diversify into uncorrelated assets like gold.
On the consumer side, Asia continues to see strong demand. Chinese consumers have increased allocations towards gold, likely reflecting the paucity of domestic savings alternatives and as a hedge on CNY-denominated savings. Indian import demand has surged following the reduction in import duty announced in this year’s budget.
Coming into the fourth quarter, we think that the wider shift in central bank interest rates towards lower levels, in tandem with a weaker USD, will continue to push gold higher. A move towards levels of around USD 2,800 per oz is entirely feasible by mid-2025.
