Thanks to escalating geopolitical risks, the prospect of interest rate cuts by the Federal Reserve, concerns about the U.S. budget deficit, inflation hedging and central bank purchases, gold prices have hit new highs in 2024. On July 17, spot gold once broke through $2,480 per ounce, setting a new record high again.
Gold prices have risen sharply this year, in part because of expectations that the Federal Reserve will cut interest rates multiple times in 2024 as stubborn inflation begins to ease. In theory, a weaker dollar and lower U.S. interest rates would increase the appeal of non-yielding gold. But it is worth noting that since the beginning of 2022, the relationship between gold and U.S. real yields has begun to decouple significantly, and this decoupling has further intensified this year.
Gregory Shearer, head of precious metals strategy at JPMorgan, said:
"Gold's recovery came earlier than expected as it further decoupled from real yields. We have been structurally bullish on gold since the fourth quarter of 2022, and the rally was earlier and more aggressive than expected after gold prices broke through $2,400 in April. The rally in gold was particularly surprising given the delay in expectations for a rate cut by the Federal Reserve and the rise in real yields driven by strong U.S. labor and inflation data."
Economic and geopolitical uncertainty is often a positive factor driving gold prices due to its safe-haven properties and ability to serve as a reliable store of value. Its low correlation with other asset classes allows gold to serve as a hedge and insurance during market declines and periods of geopolitical stress.
In addition to interest rate factors and geopolitical concerns, data shows that physical holders are also reluctant to sell gold. Despite the sharp rise in gold prices, financial markets are generally resistant to shorting gold, which highlights the structural bullish drivers of gold beyond US real yields.
“Against the backdrop of geopolitical tensions, increased sanctions and de-dollarization, we are observing increased demand for physical assets such as gold,” Hill said.
With gold prices hovering near all-time highs and interest rates expected to start falling, are precious metals due for another rally?
Natasha Kaneva, head of global commodity strategy at JPMorgan, said that despite a stronger dollar and rising U.S. yields, structural bullish factors such as U.S. fiscal deficit concerns, central bank reserve diversification, inflation hedging and tense geopolitical dynamics have pushed gold prices to record highs, and these factors are likely to remain unchanged during the U.S. election this fall.
“Nevertheless, precious metals markets will be watching for any potential policy changes that could exacerbate or alter these themes.”
"Of all the metals, we have the most confidence in our medium-term bullish forecasts for gold and silver through 2024 and the first half of 2025, but timing remains critical," Hill said. Any pullback in the coming months could provide investors with an opportunity to start positioning before the Federal Reserve starts a rate-cutting cycle.
Will gold prices hit new highs?
With gold's structural bullish factors remaining intact, JPMorgan raised its gold price targets for this year and 2025.
According to estimates from JPMorgan Research, gold prices are expected to climb to $2,500 an ounce by the end of 2024. It is worth noting that this forecast still assumes that the Federal Reserve begins cutting interest rates in November 2024, pushing gold prices to new nominal highs.
"Gold prices will remain higher in the coming quarters, with our forecasts averaging $2,500 an ounce in the fourth quarter of 2024 and $2,600 an ounce in 2025, with risks still skewed to an earlier surprise rally," Hill said. The gold price forecast is based on JPMorgan's economic outlook, with U.S. core inflation expected to fall to 3.5% in 2024 and 2.6% in 2025.
Central bank buying and ETF liquidity to support gold demand in 2024
Aside from upcoming rate cuts and growing geopolitical tensions, central banks are the main driver of gold prices in 2023 and will continue to be so in 2024.
According to the World Gold Council, central banks, led by China, bought 1,037 tonnes of gold in 2023. Likewise, 2024 got off to a strong start, with net purchases of 290 tonnes in the first quarter - the fourth-highest quarter since the buying spree began in 2022. In contrast, JPMorgan Chase expects central banks to buy a total of 850 tonnes of gold in 2024, or about 213 tonnes per quarter. Compared to the fourth quarter of 2023, net purchases in the first quarter increased by 70 tonnes, even though the gold price rose by an average of 5% month-on-month.
“Overall, the strong level of central bank buying and the continued rise in the gold price since the end of the first quarter leads us to consider the price sensitivity of central bank demand,” Hill said.
As central banks structurally buy more gold, they also appear to be becoming more tactical with regard to price. “We believe that the level of the gold price has little impact on long-term central bank purchase programs, but price changes do affect the rhythm and pace of net purchases,” Hill added.
The pace of purchases by the Chinese central bank has slowed, ending an 18-month period of heavy buying. However, other central banks and physical consumers are expected to continue to be strong bargain hunters, continuing to raise the floor price for gold.
In addition to central banks, increased investor demand in the physical gold market will also become a major source of liquidity for future gold price increases. Gold ETF holdings have been declining steadily since mid-2022, but gold holdings in London vaults have still declined as demand from emerging market central banks and physical consumers offset ETF outflows.
The renewed increase in ETF holdings triggered by the rate cut cycle could quickly tighten the physical gold market, which is expected to have a positive impact on gold prices and support price increases in the second half of 2024.
“While gold’s price action may be completely decoupled from real yields and Fed pricing at this point, we continue to believe that as money market funds become less attractive, this will add additional support later in the year, primarily from retail inflows into ETFs. While gold has already rallied sharply despite the ongoing decline in ETF holdings, the next turn could be quite bullish, driving gold prices higher on a sustained basis once again,” Hill noted.
Article forwarded from: Jinshi Data