Gold Tops $2400 Amid Rate-Cut Hope: Is the Bull Run Over?

The anticipation of a Federal Reserve rate cut in September has invigorated the gold market, propelling prices above the $2,400 threshold for the first time since May 22nd. This surge followed the release of US Consumer Price Index (CPI) data on Wednesday, which fell short of Wall Street expectations and prompted the market to price in over a 90% chance of a rate cut in September.

In its latest report, ING Group predicts the gold rally will persist through the end of 2024, driven by the hope of rate cuts, central bank purchases, ETF inflows, and safe-haven demand. The firm foresees a scenario in which the Fed could cut three times within the year, lowering the Fed funds rate to 4% by next summer.

Federal Reserve Chair Jerome Powell has indicated that the Fed might not wait for inflation to completely recede to 2% before cutting rates on Wednesday. With Powell's dovish stance and the recent CPI data coming in softer than anticipated, Wall Street is now entertaining the possibility of an initial rate cut as early as September. ING anticipates three rate cuts this year compared to the two currently expected by the markets, with the federal funds rate potentially reaching 4% by next summer.

Traditionally, lower borrowing costs benefit non-yielding assets like gold. If the historical inverse relationship between gold prices and US 10-year Treasury yields holds true, gold's strong performance may well continue even after the Federal Reserve concludes its rate-hiking cycle.

Central banks globally continued to acquire gold in May, securing an additional 10 tonnes, though the overall demand saw a slight decrease within the month. Leading the purchases were emerging market central banks, with the National Bank of Poland topping the list, followed by Turkey's and India's central banks, as reported by the World Gold Council (WGC). Despite this trend, China's activity in the gold market has slowed, with the People’s Bank of China not increasing its gold reserves for two months straight in June, halting an 18-month spree that had previously pushed gold prices to peak levels. The PBoC's gold reserves remained static at 72.8 million troy ounces.

Contrastingly, the Reserve Bank of India significantly bolstered its gold reserves, adding over nine tonnes in June alone—the largest monthly increase since July 2022. Consequently, India's gold reserves have grown by 37 tonnes this year, totaling 841 tonnes. Looking forward, the expectation is for central bank gold demand to stay robust amid the prevailing economic and geopolitical landscape.

A recent World Gold Council survey suggests that central bank gold purchases will remain strong, as 29% of surveyed banks plan to augment their gold reserves over the following year, marking the highest intent since the inception of the WGC's gold reserve survey in 2018. Last year, central banks accumulated 1,037 tonnes of gold, making it the second-largest annual addition to their reserves on record, just behind the 1,082 tonnes amassed in 2022.

In a significant shift, global gold-backed ETFs experienced their first positive inflow in a year during the month of May, with Europe and Asia driving the uptick, despite a downturn in North America. Traditionally, gold ETF holdings mirror the price movements of gold, increasing as prices rise. Despite this correlation, gold ETFs had been on a downward trajectory throughout much of 2024, even as spot gold prices soared to unprecedented levels. The trend reversed in May, indicating a renewed investor confidence in the gold market.

Additionally, COMEX net-long positions saw an increase in May compared to the previous month, further bolstering the optimistic sentiment surrounding gold. This positive shift in the marketplace is an encouraging sign for the precious metal's outlook.

According to analysts at ING, geopolitical strife is expected to continue playing a crucial role in driving the value of gold. The enduring conflict in Ukraine, ongoing instability in the Middle East, and the intensifying discord between the US and China are anticipated to keep the demand for gold robust, as investors often turn to it as a safe-haven asset during times of uncertainty. This demand is expected to underpin and elevate gold prices in the near to mid-term. Additionally, the forthcoming US presidential election and the much-anticipated reduction in US Federal Reserve interest rates are likely to further fuel the ascent of gold prices as the year progresses. Moreover, central banks' continued accumulation of gold reserves is projected to lend further support to the market's upward trend.

Traders and analysts have expressed bullish views on gold prices following the recent CPI data:

"Gold surges above $2,400 as the friendly CPI number nearly cements a September rate cut. Gold bulls are likely to push for a new all-time high perhaps as soon as next week," said Tai Wong, a New York-based independent metals trader.

"Given the overall trajectory on monetary policy and gold demand, I think the bull run is not over yet," said Zain Vawda, market analyst at MarketPulse by OANDA.

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Source: ING Group, Bloomberg