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For the first time in history, gold prices surpassed $2,500/oz on speculation that the Fed is getting closer to a rate cut. The previous high for spot gold, set last month, was surpassed on Friday afternoon when prices soared beyond $2,500/oz.
Following dismal US housing statistics, which has bolstered predictions of quicker and larger cutbacks from the Fed, the index increased.
This comes when Bitcoin has been unable to breakthrough $60,000 and is fast losing its shine as the "digital gold."
Gold benefits from lower borrowing costs since it does not pay interest.
Since last July, the Fed has kept its key policy rate at 5.25% to 5.5%, the highest level it has been at for over 20 years.
Analysts at BRN now project a 25 basis point (bps) decrease in September, followed by a sequence of 25 bps adjustments, bringing the Fed funds rate back to about 3.5 per cent by next summer.
Due to geopolitical unpredictability, central bank appetite, and anticipation of interest rate cuts, gold has risen over 20 per cent this year.
In our opinion, the size and timing of the Fed's anticipated rate drop will continue to be the primary concerns of gold market participants.
Gold prices will continue to be influenced by geopolitical tensions and will be supported by safe-haven demand for the foreseeable future due to events such as the war in Ukraine, the continuing strife in the Middle East, and tensions between the US and China.
BRN's prediction is that gold will keep rising until the end of the year, helped along by the US presidential election in November. Additional support should also come from the expectation that central banks would continue to increase their holdings.
According to a Reuters report, the People's Central Bank of China (POBC) has allocated additional quotas for gold imports to various banks in anticipation of a revival in demand despite historically high prices.
Aiming to assist the PBOC in managing the influx of bullion into the world's largest consumer of the precious metal, the new restrictions were approved in August following a two-month hiatus, mostly as a result of slower physical demand following a bullish market.
On Friday, spot gold reached a new high of $2,500.99 per ounce, continuing its 21% year-to-date gain.
The dollar's weakness and the growing anticipation of US monetary easing in September contributed to this price increase.
The March–April spike in bullion prices was driven in large part by strong Chinese buying, which, according to analysts, might lead to even higher prices if demand increases again.
But why is gold rising if inflation is falling?
Additionally, why have central banks begun to stockpile gold?
It may appear paradoxical for central banks to hold onto gold while inflation is falling, yet they do so for a number of strategic reasons.
Gold is kept by central banks as a means of diversifying their assets, namely their foreign exchange reserves. During periods of economic instability or geopolitical unrest, the value of gold, which is seen as a "safe haven" asset, tends to stay steady or even rise.
To hedge against future economic volatility, central banks may continue to collect gold even while inflation is reducing. Gold is commonly seen as a way to protect one's wealth against the possibility of a currency's depreciation.
Central banks may decide to expand their gold holdings despite the present inflation trend if they anticipate that their currency will fall as a result of other economic causes, such as trade deficits, political instability, or reduced interest rates.
Central banks may remain worried about the state of the global economy even if inflation is falling at home.
To be on the safe side, central banks may decide to boost their gold holdings in response to events such as rising geopolitical tensions, trade disputes, or instability in the financial markets.
Central banks have the option to cut interest rates in order to boost economic growth when inflation is dropping.
Gold and other non-yielding assets might become more appealing when interest rates are low because they have less opportunity cost to store them. Central banks may decide to enhance their gold holdings in preparation for potential rate cuts in the future.
Central banks often maintain their reserves with an eye towards the future. Even if inflation in the short term is managed, a longer-term strategy that includes purchasing gold can help secure financial stability.
Throughout its long and storied history, gold has consistently served as a safe haven for wealth. The worldwide market's supply and demand dynamics can also impact gold prices. Gold prices can rise if other major investors or central banks start buying up the precious metal. This would cause more buyers to step in and try to keep up with the price increase.
On a technical level, gold has broken out on strong volume, surpassing the resistance of an ascending channel.
Even as cryptos seem to languish in low levels, gold's position is getting stronger over the past few weeks, breaking the correlation with gold significantly.
What remains to be seen is if the reversal in cryptos as expected from rate cuts start to rebuild the correlation.
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