It’s no surprise that expectations of a rate cut by the Federal Reserve are behind gold’s recent rally to fresh all-time highs, as recession fears boost the appeal of the precious metal.

But even if the Fed takes unexpected steps, gold could prove its value as an “all-weather risk hedge.”

Brien Lundin, editor of Gold Newsletter, said there is some risk of ‘buying the rumor and selling the fact’ when the Fed’s interest rate decision or actual rate cut is very close. However, global portfolios are increasingly adding gold allocations because the precious metal will perform well regardless of whether the Fed cuts rates gradually or is forced to do so more urgently amid recession fears.

“The lesson, in my view, is that gold has established itself as the ‘all-weather risk hedge,’ ” he said.

Last Friday, gold futures for December delivery on the New York Mercantile Exchange rose $30.10, or 1.2%, to close at $2,610.70 an ounce, after hitting an intraday all-time high of $2,614.60. The weekly increase was 3.4%, setting the 34th closing high this year.

For now, momentum in Western markets has been a short-term driver for gold prices ahead of the Federal Reserve's upcoming rate cut, Joe Cavatoni, senior market strategist at the World Gold Council, said in an emailed comment.

As of last Friday, the CME FedWatch tool showed that the probability of the Federal Reserve cutting interest rates by 50 basis points and 25 basis points at next week's meeting has risen to 50-50.

Cavatoni believes that while the impact of expected rate cuts can be seen in the rise in gold prices, they are "not yet fully priced in." He said rate cuts could "increase upward price pressure in the coming weeks and manifest as increased investor demand over a longer period of time."

Gold demand

Cavatoni noted that as a global asset, the World Gold Council is always watching “demand for gold in all its forms,” and that this could change as prices hit record highs.

He said the trade association has been watching jewelry flows in Asia to see how investment demand in the region is performing. It is also assessing other factors spurring demand from Western investors, including the possibility of increased uncertainty from upcoming elections and the fact that gold can serve as a hedge against “immediate event risk.”

Cavatoni said that globally, demand from central banks remains a key driver, with central bank purchases reaching 14-year highs in 2022 and 2023, "also supported by continued concerns about dollar assets and inflation."

Aside from central bank demand, traders appear to favor one form of gold investment over another.

Adrian Ash, director of research at BullionVault, said that current investment in gold is still "limited to speculative trading in derivatives contracts rather than physical gold."

He said users of BullionVault, the world's largest online service for investing in gold, silver, platinum and palladium, continued to be "net profitable" as a group, while coin dealers remained "flooded with second-hand product sold to them by previous buyers".

On Thursday, trading in the main gold futures contract on the CME Derivatives exchange was up more than 26% from the daily average in September, and trading in highly leveraged gold options contracts was up 80%, Ash said. The SPDR Gold Shares ETF, which is backed by gold, is up 0.9% so far in September.

In contrast, BullionVault, where users hold more than $3.6 billion in gold, saw demand for gold rise 14% in the last 24 hours, but selling surged 298%, resulting in “net selling” of nearly 0.1 tonnes, he said.

Ash said investors took profits as gold prices hit their latest all-time highs in U.S. dollars, euros and British pounds. This was due to "leverage and lack of fear" as the rally was "more about the Fed rate cut next week" than about geopolitical tensions.

He explained, “Geopolitical violence and tensions were setting the stage for an upward trend in gold prices, secured by a sustained bid for gold from emerging market central banks outside the West, but now speculation of a Fed rate cut is dominating new record prices.”

Ash added that any disappointment, either from the rate decision or the new dot plot projections as the Federal Reserve concludes its two-day policy meeting, would likely give long-term investors hoping for lower gold prices a much-needed pullback, if not a correction.

Article forwarded from: Jinshi Data