Gold recently reached new highs. The excitement around the precious metal continues, fueled by the approach of the first rate cuts in the United States, central bank purchases and the persistence of significant geopolitical tensions. Gold continues its crazy rise. Gold prices have gained more than 20% over the past six months but the upward movement accelerated at the beginning of March. Investors now no longer doubt that the US Federal Reserve will make several rate cuts this year. Its president, Jerome Powell, confirmed this during his press conference on March 21. The precious metal is a safe haven asset, just like American government bonds and the dollar. But it does not pay dividends or interest. Therefore, its relative attractiveness compared to other safe-haven assets increases, when interest rates fall (and vice versa).
Don’t overreact
The non-volatile component of the Fed’s preferred gauge of underlying inflation – the core index of personal consumption expenditures, or core PCE – slowed in May. This should reassure the Fed even if the overall indicator rebounded from +2.4% in January (at an annual rate) to 2.5% in February. They are not going to overreact because the data from the last two months are higher according to Jerome Powell.
Bank of America predicts gold will hit $3,000 in the next 18 months
Earlier this week, Bank of America analysts revealed that gold could hit $3,000 in the next 18 months, driven by demand from central banks and a dovish shift from the Federal Reserve. Achieving this level would require non-business demand to increase from current levels, which in turn requires a rate cut by the Fed, according to Bank of America analysts comments to investors. Current market conditions do not justify this price level at the moment, Bank of America warned, as analysts estimated (https://goldsupply.org/gold/) that a 20% increase in demand could push prices to $2,500. Previously, the bank’s analysts had predicted that a similar rise could occur in 2023.
Gold’s rise appears to be due to technical factors
The precious metal surpassed its historic record this week, to get closer to $2,150 per ounce. But this recent progression is not justified by the fundamentals. If the major American, European, or even (and especially) Japanese indices, just like bitcoin, are setting records, gold is not left out. The precious metal recently surpassed its historic record on the stock market, bringing its new peak this week to 2,185.50 dollars per ounce. The barbaric relic, as the famous economist John Maynard Keynes nicknamed it, has gained 4% since the start of the year, and is up 18.5% over one year. This recent rise in gold is, however, not easy to explain. Financial commentators also notes that this upward movement surprised market observers.
A logic on rates that does not work
For a simple reason: in theory, the evolution of gold is negatively correlated with that of interest rates. The higher the interest rates, the less theoretically attractive gold is, all things being equal. Unlike stocks (with dividends) and bonds (with coupons), gold does not produce income. Its price is consequently hit by a rise in interest rates, because it then becomes less and less interesting to invest your money in gold rather than investing it. However, although there is unanimous agreement on the idea that central bank key rates have reached their peak, the market has been forced, in recent weeks, to significantly revise its expectations of rate cuts. For example, investors are counting on a first cut in June from the American Federal Reserve, when the market was still banking on March at the end of 2023. The number of rate cuts has also been largely revised downwards, and the some economists are even banking on no cuts this year from the Fed (). The velocity and the speed of the rise was very sudden, very rapid. There doesn’t seem to be any compelling evidence. Physical demand for coins or bars may be stronger than expected, with analysts raising the possibility that Chinese consumers bought gold during the Lunar New Year festivities to hedge against turmoil in the stock and real estate markets. Commodities strategist consider that the risk of a correction on global equity markets could also have boosted demand. Perhaps also the purchases of certain major central banks may have provided a little support. The People’s Bank of China, the country’s central bank, announced that it had increased its gold reserves for the sixteenth consecutive month.
Technical elements
UBS (https://www.ubs.com/uk/en.html) questioned the rise in gold in a note: even if we were among the few to promote the idea that gold could progress significantly this year on the basis of better fundamentals including demand from the technology sector (https://www.hiddennolonger.com/new-technologies-at-the-service-of-the-environment/), the account is not there in the last few days from a fundamental point of view. Some banks also point out the theoretical inconsistency of the rise in gold prices at a time when the monetary markets are integrating key rate cuts by the Fed of 86 basis points, or 0.86%, compared to 117 basis points just a month ago. Gold is therefore clearly influenced by other elements. They believe that more technical factors have been at play recently, with prices having crossed key resistance levels, thanks to buyers oriented towards the short term. But increasing attention to the US presidential election, continued central bank buying and still relatively modest speculative positioning indicate that this rally still has a bright future ahead of it in the medium term, particularly if ETF purchases are recovering, generally following the trend. UBS talks about the medium term. In the short term, the Swiss establishment recommends waiting before positioning itself on the precious metal in order to avoid disappointments. The bank suggests watching for a return of gold to around 2,000 or 2,050 dollars before strengthening a long position. The establishment also suggests looking at mining groups extracting gold rather than immediately buying the raw material itself. If the bank does not give a name, we can cite as examples the Canadian Barrick Gold or the British Fresnillo.
