2024-09-16 00:10:27
The price of gold is now trading at an all-time high, surpassing the barrier of 2,600 dollars per ounce.
Since the beginning of the year the price of the precious metal has increased by 20%. In euros, gold also managed to surge to a new record high of over €2,300.
For the record, on January 1, 2008, the year of the Lehman Brothers crisis, an ounce cost about $900 – the gain in those 16 years was 180%.
The reduction of interest rates
The driving force behind the explosion of the precious metal is the expectation of a rate cut by the Fed next Wednesday, after the new cut of 25 basis points by the ECB, with the market expecting another cut in December
The market expects Fed rate cuts of more than 100 basis points by the end of the year, which means that at one of the two remaining meetings after September, rates will definitely need to be cut by 50 basis points.
In fact, according to Fed Funds Futures, key interest rates in the US are expected to decline by more than 200 basis points by mid-2025.
The lower the interest rates, the lower the bond yields, the better for gold. Falling interest rates and high inflation rates create a good environment for investing in gold. “Some investors are also using gold as a safe-haven investment in a risky environment,” says Bob Haberkorn, chief market strategist at RJO Futures. He even pointed out that the slight increase in US inflation as well as the weakest employment report this week, which “could prompt investors to hedge their holdings in gold if the US economy slips into recession.”
No return to normality
The United States, in a year of economic recovery, posted, as last year, a record deficit that has no historical comparison, unless World Wars or global pandemics are taken into account.
The growing national debt that exceeded 35 trillion dollars (130% of GDP) and the deficit at 7%, is the long-term argument for maintaining investments in gold.
It is likely that what has been happening to gold in recent weeks is related to these aspects.
As the US presidential election approaches, investors are discovering that neither of the two candidates – Kamala Harris and Donald Trump – has a substantial recipe for solving the US government’s financial imbalances.
To restart growth, fiscal stimulus should be implemented in addition to the current ones.
It is becoming clear, especially given the costs imposed by an aging population, that there is no prospect of a return to normality for the US deficit. In the long run, this implies at least two things: the first is pressure on the Fed to support an expanding debt and reduce its cost to the government. The second is the devaluation of the dollar and the larger problems of containing price dynamics.
Bulk purchases
The rise in the price of gold has of course also been boosted by massive central bank purchases and strong demand for safe havens due to the conflicts in the Middle East and Ukraine, while interest from private investors is also increasing.
Central banks around the world bought massive amounts of gold, driving up its price.
Above all, the Chinese central bank and Turkey increased gold reserves. Officially, of course, China has suspended its purchases for the past three months. However, industry watchers assume that China will quickly strike again in the event of a correction.
Strong buyers of gold continue to include Russia, Uzbekistan, India, South Africa and Brazil. Recently, Poland has also increased its gold reserves.