Global stock market took a hit amid the "September effect," with $Nasdaq Composite Index (.IXIC.US)$ falling 3.26%, $S&P 500 Index (.SPX.US)$ down 2.12%, and $Dow Jones Industrial Average (.DJI.US)$ off 1.51% on Tuesday. Asian markets also dipped in the following trading day, with $Nikkei 225 (.N225.JP)$ down 4.24% and $S&P/ASX 200 (.XJO.AU)$ sliding 1.88%. The sell-off followed the weaker-than-expected US ISM manufacturing data, raising economic concerns but possibly boosting the odds of a Fed rate cut. In this context, gold, as a safe-haven asset, stands out, outperforming the broader market. Gold prices have risen approximately 21% this year, outpacing the S&P 500's year-to-date increase of 15.73%.

Key factors driving gold prices this year

Fed's rate cut expectation. The Federal Reserve's monetary policy, particularly rate cuts, significantly influence gold prices. Typically, a Fed rate cut leads to a depreciation of the US dollar, consequently boosting the price of gold, which is priced in dollars. Additionally, rate reductions affect real interest rates, diminishing the opportunity cost for investors holding gold and thereby further stimulating demand and elevating gold prices. Currently, economic indicators and recent Fed communications indicate that a rate cut in September is increasingly likely, although the market remains divided on the extent of the cut. According to the CME Group's FedWatch tool, the probability of a rate cut of 25 basis points is 57%, while the probability of a 50 basis points cut is 43%.

Rising geopolitical tensions. Geopolitical tensions are driving a surge in market risk aversion, prompting investors to seek sanctuary in safe-haven assets. Gold, with its storied history as a stable and reliable asset, is garnering favor amid volatility. This year has seen a steady climb in geopolitical risks, from Middle Eastern unrest to the ongoing conflict between Russia and Ukraine, bolstering demand for gold as a hedge against uncertainty.

Central banks around the world increase gold reserves. In recent years, as the US dollar's creditworthiness has been on the decline and the US fiscal deficit has been growing, the global demand for gold reserves has been steadily rising. The World Gold Council reports a significant uptick in holdings, jumping from 1,082 tons in 2022 to 1,030 tons in 2023, and a further 483 tons in the first half of this year, marking an all-time high for that period. This trend underscores central banks' robust confidence in gold as a reserve asset, indicating sustained demand.

Gold outlook: US labor market emerges as a key indicator

Gold investors are supposed to take a close look at this Friday's release of the US non-farm payrolls report for clues on future gold price movements. A resilient jobs market could signal the Federal Reserve's inclination towards a more moderate rate cut, potentially exerting downward pressure on gold prices and continuing the current correction trend. Conversely, a significant shortfall in employment data might increase the likelihood of deeper Fed rate cuts, propelling gold prices upwards and potentially driving a new rally to record highs.

Bank of America's commodity strategy team reaffirms its forecast for gold to surpass the $3,000 per ounce milestone next year, consistent with its previous estimates. Despite gold prices reaching a record high above $2,500 per ounce this year, the team maintains its confidence in gold's potential to challenge the $3,000 threshold within the next 12 to 18 months, driven not by commercial buying but by non-commercial demand.

Macquarie, on the other hand, anticipates the US Federal Reserve will enter a rate-cutting cycle, with recent weak economic data potentially leading to faster and more aggressive policy easing than expected. This outlook is expected to sustain the strength in gold prices, with Macquarie's commodities team forecasting gold to reach $2,277 per ounce this year and $2,425 per ounce next year, highlighting gold as a short-term winner.

Goldman Sachs analyst Stephen Quinn forecasts in a report titled “Go for Gold” that gold has the highest potential for price increases among commodities, with a target of $2,700 per ounce by early 2025. Goldman Sachs’ bullish outlook for gold is underpinned by three key factors:

US Debt Crisis: We believe that due to concerns about US financial sanctions and US sovereign debt, global central bank gold purchases have doubled since mid-2022, which is structural, and this situation will continue regardless of whether the concerns materialize or not.

Fed Rate Cuts: Fed rate cuts will attract Western capital back to the gold market, and the momentum of a significant increase in gold prices over the past two years has not materialized.

Hedging Value: Gold provides important hedging value for portfolios to withstand geopolitical impacts such as tariffs, Fed subordination risks, and debt concerns.

How to seize opportunities for potentially rising gold prices?

Gold ETFs:

ETF offers a convenient way to invest in gold without the need for physical storage, making it accessible to a broad range of investors.

1. $SPDR黄金ETF(GLD.US)$, the gold ETF with the largest assets under management (AUM), aims to track the price of gold bullion. It has experienced a gain of over 21% this year and 62% over the past five years.

2. $ProShares两倍做多黄金ETF(UGL.US)$ seeks to provide double the daily return of the Bloomberg Gold Subindex, designed for investors looking for leveraged exposure to gold prices. This ETF has recorded gains of over 37% this year and 79% over the past five years.

Gold Mining Stocks:

Investing in gold mining companies can offer leveraged exposure to gold prices. However, it's important to note that these investments come with additional risks related to the mining industry, such as operational challenges and regulatory issues. Here are some prominent gold mining stocks:

1. $纽曼矿业(NEM.US)$, listed on AU, US and CA, is the world largest gold mining corporation with the market cap of about USD$60 billion and it has a diverse portfolio of gold mines around the globe. Last month, the company reported an profit of $834 million, or $0.74 per share, for the recent quarter, which is alomst three times higher than the same period last year.

2. $伊格尔矿业(AEM.US)$ : This Canadian-based company ranks as the third largest gold producer in the world with operations in Canada, Australia, Finlan and Mexico. It has significantly outperformed Gold price this year, surging over 51% YTD, and offers a 1.97% dividend yield, distributing $0.4 per share on a quarter basis.

3. $巴里克黄金(GOLD.US)$ : One of the world's largest gold mining companies, Barrick Gold operates mines and projects in various countries. Jon Mills, mining equity analyst from Morningstar, metioned that gold companies like Barrick tend not to follow general economic cycles, providing a hedge to inflation risk.

Source: CME Group, Goldman Sachs, Macquarie, Bank of America, Bloomberg