Boosted by multiple favorable factors, gold prices continue to rise strongly.
On October 22nd, spot gold increased by more than 1%, approaching $2,750 per ounce, setting a new historical high. By October 23rd, spot gold rose again, breaking through $2,750 per ounce, once again breaking historical records.
Lu Zhenxing, head of the financial research institute at Baocheng Futures, told a reporter from 21st Century Economic Report that the pattern of gold gradually strengthening during the Federal Reserve's interest rate reduction cycle remains unchanged. Coupled with the recent intensification of geopolitical conflicts in Russia, Ukraine, and the Middle East, gold continues to rise after a brief consolidation. In the short term, the previously released U.S. retail sales data for September exceeded expectations, showing the resilience of the U.S. economy, and market inflation expectations have risen, pushing gold prices further up.
After spot gold soared by 30% this year, will there be a risk of price correction next? Can the luster of gold continue to shine?
Why gold prices set new highs again
Behind the recent continuous new highs of gold, a series of favorable factors are at play. Factors such as the uncertainty of the U.S. election and conflicts in the Middle East have stimulated demand for safe-haven assets, and expectations of further monetary policy easing by the Federal Reserve have also amplified the rise in gold prices.
The recent heating up of the "Trump trade" is closely related to the rise in gold prices. Kelvin Wong, a senior market analyst for OANDA Asia Pacific, said that in the face of uncertainty in the U.S. election, investors are seeking gold as a safe-haven asset. Trump's policies may support gold or exacerbate trade tensions and expand budget deficits.
The situation in the Middle East that is difficult to cool down is also supporting gold prices. After Iran launched a large-scale missile attack on Israel on October 1st, Israel vowed to retaliate, threatening to strike Iran's oil facilities. Iranian President Pezeshkian said on October 22nd that every attack by Israel will be appropriately responded to.
In terms of monetary policy, although expectations for interest rate cuts by the Federal Reserve have cooled recently, the direction of rate cuts is not in doubt, which is also beneficial for gold. San Francisco Federal Reserve Chairman Daly said that he expects the Federal Reserve to continue cutting interest rates to prevent further weakness in the labor market. "So far, I have not seen any information that indicates we will not continue to cut interest rates. For an economy with an inflation rate close to 2%, the current interest rates are very tight, and I do not want to see the labor market deteriorate further."
In the view of Zhong Zhengsheng, the chief economist of Ping An Securities, the "overshooting" of gold prices also reflects market concerns about U.S. fiscal and dollar credit. After the outbreak of the Russia-Ukraine conflict in 2022, the United States implemented various economic and financial sanctions, triggering international doubts about the status of the dollar. In the first half of 2023, against the backdrop of the decline in the international reserves of the dollar, the outbreak of the U.S. banking crisis, and the approaching U.S. debt ceiling crisis, discussions on "de-dollarization" heated up, and gold prices rose significantly.Mohamed El-Erian, Chief Economic Advisor at Allianz, analyzed that the continuous gold purchases by foreign central banks are an important driving force for the strength of gold. Non-American countries and businesses are actively seeking potential alternatives outside the dollar-based payment system.
Be vigilant about the risk of short-term pullbacks.
It should be noted that despite the recent surge in U.S. Treasury yields and the U.S. dollar, gold prices have continued to rise.
Lu Zhenxing told reporters that the relationship between gold and the U.S. dollar, U.S. Treasury yields has changed after 2023, often rising and falling together, reflecting the changes in their respective credits. The United States implemented an ultra-loose monetary policy during the pandemic, and during the Russia-Ukraine conflict, sanctions on Russia's overseas assets have formed a long-term blow to the credit of the U.S. dollar. Gold has once again become the most reliable credit, which can be seen from the gold purchases by central banks in recent years. Therefore, the U.S. dollar, U.S. Treasury yields, and gold sometimes have a more independent trend. However, in the short cycle, most of the time, they still have a seesaw relationship.
Since 2022, the traditional negative correlation between gold prices and the 10-year U.S. Treasury real interest rates has continued to weaken, showing an overall "gold strong, debt weak" pattern. Zhong Zhengsheng analyzed that from 2003 to 2021, the correlation coefficient between gold prices and the 10-year U.S. Treasury real interest rates was -0.91. However, from the beginning of 2022 to September 2024, the correlation coefficient between the two became 0.44, and the traditional negative correlation temporarily weakened. Specifically, the outbreak of the Russia-Ukraine conflict in March 2022 was the starting point of this round of divergence between gold prices and U.S. Treasury real interest rates. After March 2024, gold prices further "immunized" against the rebound of U.S. Treasury real interest rates, rising against the trend and increasing the degree of divergence between the two.
Is there a pullback risk for gold in the future? Zhong Zhengsheng believes that under the current background of the Federal Reserve starting to cut interest rates, gold is more attractive than U.S. Treasury bonds, which makes gold有望 to have a stronger performance. However, considering the current speculative position congestion, the recent rebound of U.S. Treasury yields, the improvement of China's economic prospects, and the potential cooling of Asian allocation demand, gold prices may face certain adjustment risks in the short term.
Zhong Zhengsheng analyzed that the recent rebound of U.S. Treasury yields has gradually accumulated pressure on gold prices. Historically, under the scenario of a "soft landing" of the U.S. economy, the 10-year U.S. Treasury yield often rebounds in the first 1-2 months after the first interest rate cut. After the Federal Reserve starts the interest rate cut cycle, the U.S. economy and inflation may have certain upward risks. As of October 1, the Atlanta Fed's GDPNow model forecasted that the U.S. third-quarter GDP growth rate was 2.5% year-on-year. Recently, due to the Federal Reserve's expected guidance and the latest strong non-farm employment data, the 10-year U.S. Treasury yield has rebounded significantly, and the pressure on gold prices has also gradually accumulated. Although the correlation between gold prices and U.S. Treasury (real) interest rates is not as strong as before, it has not disappeared. From April this year to September 18 before the Federal Reserve cut interest rates, the rise in gold prices was more synchronized with the decline in 10-year U.S. Treasury real interest rates.
However, the risk of a significant drop in gold prices may not be high. Lu Zhenxing said that gold is unlikely to have a deep pullback. Both long-term logic and short-term contradictions support the continued strength of gold prices. From the perspective of CFTC positions, non-commercial net long positions have increased since March, with some short-term fluctuations, which may cause high price volatility.
Is the market expected to rise to $3,000?
Although gold prices have risen by more than 30% this year, Wall Street still generally believes that the rise in gold prices is far from over.Sprott Asset Management's market strategist, Paul Wong, has stated that gold is entering a new bullish phase after reaching new highs. "Driven by central bank buying, rising US debt, and the potential for the dollar to peak, gold has entered a new bullish phase, with central banks and investors more likely to allocate to precious metals."
According to Michael Widmer, a commodity strategist at Bank of America, gold now looks better than ever, with rising government debt levels and geopolitical uncertainties brewing. Heightened geopolitical tensions typically lead investors to flock to safe-haven assets like gold to cushion against the risks and instability of global markets.
An increasing number of analysts are even predicting that gold prices could continue to rise, with $3,000 per ounce not being far off. Vivek Dhar, an analyst at the Commonwealth Bank of Australia, expects the average gold price for the fourth quarter to reach $2,800 per ounce, and with the overall weakening of the dollar, he forecasts that the average gold price for the fourth quarter next year will reach $3,000 per ounce.
Citi also expects gold prices to reach $2,800 per ounce within three months and to touch $3,000 per ounce in the next 6 to 9 months. Despite a decline in retail demand over the past three months, gold prices remain "very good," with buyers willing to pay higher prices.
Compared to US Treasuries, gold is now more favored by investors. Zhong Zhengsheng stated that gold and US Treasuries have historically been considered "safe assets," typically becoming investment attractions during interest rate cuts or after the outbreak of global risk events. During the Federal Reserve's interest rate cut cycle in 2019 and the impact of the COVID-19 pandemic in 2020, non-commercial long positions in COMEX gold and CBOT 10-year US Treasuries were at historically high levels. However, during the Russia-Ukraine conflict in 2022 and before and after this round of Federal Reserve rate cuts, due to the weakening of the dollar's credit, gold long positions remained high, but US Treasury long positions were significantly lower. Given that the US Treasury market is much larger than the gold market, funds spilling over from the US Treasury market or a reduction in inflow could have a noticeable pull effect on the gold market.
Looking ahead, Lu Zhenxing analyzed that the pace of the Federal Reserve's interest rate cuts may cause gold to fluctuate at high levels, with some uncertainties still lying ahead. However, overall, Lu Zhenxing remains optimistic about the future, and gold prices may reach a new level. In the short term, geopolitical conflicts bring safe-haven demand, and economic data may bring inflation trades. In the long term, the Federal Reserve's interest rate cut cycle and the的提升 of gold's credit status will continue to support gold prices.