The Increasing Appetite for Gold Amid Geopolitical Tensions
Gold prices have seen a significant surge in recent days, surpassing $2,500 per troy ounce and even crossing the $1 million mark for a 400 oz. London Good Delivery gold bar. This surge is a result of investor expectations that the U.S. Federal Reserve may cut interest rates. Lower interest rates tend to drive up gold prices as they make other assets, like government bonds, less attractive to investors.
The anticipation of a rate cut has led many interest rate traders to expect a 25 basis point reduction during the upcoming Fed meeting in September. However, economist Mohamed A. El-Erian suggests that the pressure from the market could potentially push the Fed into a 50 basis point cut, similar to what happened in the fourth quarter of 2018.
While there is a high expectation for a rate cut, there is also the possibility that the Fed may not meet these expectations. In such a scenario, gold prices could be negatively impacted. David Meger, director of alternative investments and trading at High Ridge Futures, suggests that traders may be disappointed if the Fed only indicates a 0.25 basis point rate cut without hinting at the possibility of a larger 0.50 basis point cut.
The gold price trend in August has historically been positive, according to a report by the World Gold Council (WGC). The upcoming Jackson Hole Economic Policy Symposium, which will feature central bankers, policymakers, academics, and economists from around the world, is expected to have a powerful influence on gold prices. The WGC states that if speeches at the symposium suggest that expectations are too dovish, it could lead to a downward movement in equities, bonds, and gold.
Another factor influencing gold prices is the upcoming U.S. elections. The WGC believes that gold is likely to benefit from uncertainty more than any political proclivity. The confirmation of Kamala Harris as Joe Biden’s running mate is expected to further stir the pot. Additionally, after the election, investors are expected to consider the level of U.S. national debt and deficit, which could keep interest in gold high.
Gregory Shearer, head of base and precious metals strategy at J.P. Morgan, noted the increased appetite for buying real assets, including gold, amid geopolitical tensions, increased sanctioning, and de-dollarization. This safe-haven status of gold has acted as a support for prices. Furthermore, many physical holders of gold are reluctant to sell their holdings, indicating a general aversion to short bullion financially, despite the rally. This highlights gold’s structurally bullish drivers outside of U.S. real yields.
UBS analyst Giovanni Staunovo predicts that gold could continue to rise in the coming months, potentially reaching $2,600 per ounce by the end of the year. All eyes will be on any indication of an imminent rate cut from Fed Chair Jerome Powell.
In conclusion, the surge in gold prices is a result of investor expectations of a rate cut by the U.S. Federal Reserve, combined with geopolitical tensions and uncertainty surrounding the upcoming U.S. elections. While there is a possibility of a rate cut not meeting expectations, the safe-haven status of gold and reluctance of physical holders to sell their gold provide support for prices. The Jackson Hole Economic Policy Symposium and any indications from Fed Chair Jerome Powell will be closely watched for further insights into the future of gold prices.
