Gold Prices Soar Past $2,500: Buoyed by Fed Rate Cut Speculation and Geopolitical Tensions
AInvestSaturday, Aug 17, 2024 3:00 am ET
2min read
On August 16, local time, spot gold surged past $2,500 per ounce, marking a historic high. Analysts attribute the surge to the anticipation of a Federal Reserve rate cut, driving gold prices above the $2,500 threshold for the first time. Bolstered by optimism regarding monetary easing policies and substantial gold purchases by central banks worldwide, gold prices have risen by over 20% this year. Additionally, increasing geopolitical risks, including tensions in the Middle East and the Russia-Ukraine conflict, have heightened the demand for gold as a safe-haven asset.
The rise in gold prices has significantly impacted related ETFs. According to data from Tonghuashun iFinD, as of now, there are 14 gold-themed ETFs in the market. Tracking indices related to gold stocks and investing in gold spot contracts, these ETFs have achieved double-digit returns this year. In the first half of the year, domestic gold ETF holdings surged to 92.44 tons, up by 30.97 tons from the end of 2023, marking a 50.38% increase.
Wang Yanqing, the chief researcher on precious metals at CITIC Construction Investment Futures, foresees the bullish trend continuing for three main reasons: a slow global economic recovery prompting Western countries to exit high-interest environments, giving an edge to scarce quality assets like gold; the impending rate cuts by the Federal Reserve as U.S. inflation trends down; and de-dollarization along with rising geopolitical risks driving increased demand from central banks worldwide.
However, the frequency and height of gold price volatility have also led to a slowing of global central bank gold purchases. According to the World Gold Council, global central bank gold reserves increased by 483 tons in the first half of the year, a 5% year-over-year growth, setting a historical high. Yet, compared to the first quarter's addition of 290 tons, the second quarter saw only 193 tons, a 33% drop.
Specifically, in June, central banks globally net purchased 12 tons of gold, up from May’s 10 tons but significantly lower than April’s 33 tons. Overall, both the purchase and sale volumes of gold by central banks have waned compared to the same period last year. Particularly notable is the variation in buying patterns among emerging market central banks.
China's central bank, which had been a mainstay buyer for 18 consecutive months, halted gold acquisitions following record high prices in May. India, on the other hand, has stepped in, purchasing 18.6 tons in the second quarter, with over 9 tons added in June, marking it as the top buyer.
Despite the record-setting highs, gold jewelry demand fell by 19% year-over-year to 391 tons in Q2 2024, while bar and coin retail demand dropped by 5% to 261 tons. Additionally, various central banks have exhibited mixed strategies: while countries like India and Uzbekistan continue their purchases, others like Singapore and Kazakhstan have offloaded significant holdings.
The potential future trajectory of gold prices remains a subject of speculation. While central bank gold purchasing may slow in the face of high prices, impending rate cuts by the Federal Reserve could provide further impetus for gold. The broader international geopolitical landscape also continues to play a crucial role in influencing gold prices. As long as geopolitical risks persist and monetary policies remain favorable, the long-term outlook for gold appears to be positive.
In conclusion, while the immediate term may see some retracement due to central bank actions and high price volatility, the overall drivers – from Fed rate cuts to geopolitical tensions – remain in place to support a continued bullish trend in gold prices over the medium to long term.
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