Gold’s bull run could soon come to an end

Noushad Thekkayil/NurPhoto via Reuters Connect

Another week, another record high gold price. The metal’s ascent so far this year has been inexorable. The gold stuff hit a historic high of $2,160 per ounce in March, followed by records of $2,265 in April and $2,435 in May.

The recent surge is largely due to two, often related, factors. First, gold, like many commodities, is priced in US dollars. When the dollar weakens, as it has done by around 4 percent since July, the gold price typically rises as it becomes less expensive in local currency terms. (Buyers in most Gulf countries are less affected by this channel given that their currencies are pegged to the dollar.)

Second, gold is an asset that bears no interest. As interest rates fall, gold prices typically rise as holding other assets becomes relatively less attractive to investors. 

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In recent weeks, it has become increasingly clear that the Fed will start cutting interest rates, most likely starting in September. Investors widely share this view and, as such, the dollar has weakened, treasury yields have fallen, money has poured into gold-backed exchange traded funds and the gold price has risen.

This year global central banks have added to gold reserves en masse to hedge against economic uncertainty and currency fluctuations. According to the World Gold Council, global central banks’ demand in the first half of 2024 was the highest on record.

The UAE Central Bank, for example, hiked its reserves by 19.7 percent year on year, reaching AED20.6 billion ($5.6 billion) by the end of May 2024, and up from just AED1.1 billion in 2018.

Surge unlikely

As the Fed carries out its anticipated interest cuts, gold prices are likely to rise further, but a big surge in prices is doubtful. The cuts are widely expected by investors and should already be largely factored into the price of gold so further upward pressure may be fairly modest.

Another reason that a big rally in gold prices is unlikely is that global jewellery-related demand is crumbling under the weight of high prices. China’s gold imports fell in June and then again in July. India’s import volumes have so far been more stable this year but are lower than this time last year.

It’s too early to tell whether July cuts to India’s gold import tariffs will provide a prolonged boost to demand but with prices this high, it is probable that demand for jewellery will weaken. This, in turn, could mean lower gold imports from the UAE, one of India’s largest suppliers.

Other drivers of gold demand will remain more supportive of the price. China’s equity market has languished this year and the ongoing problems within its property sector will make real estate an unattractive place for storing wealth. Gold-backed funds offer an obvious alternative.

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Indeed, strong investment demand in China contributed to why gold prices surged over the first four months of the year, even as the dollar and treasury yields edged slightly higher.

Of course, gold is also typically considered a hedge against all manner of geopolitical risks from the reasonable to the outright peculiar. It’s difficult to gauge how much of recent gold buying has been related to safe-haven demand and even more difficult to gauge how much more gold will be bought for this reason. 

That said, with the Ukraine-Russia war rumbling on, the outcome of the US presidential election uncertain and a ceasefire deal between Israel and Hamas yet to materialise, it appears likely that geopolitical risks will, at the very least, support gold prices over the next few months.

Bill Weatherburn is senior climate and commodities economist, Capital Economics