Gold prices set fresh highs in August and remain well supported on global issues and ahead of September’s expected US rate cut 

• US economic data in August supported the view that the US Federal Reserve will start cutting interest rates in September.
• “The time has come for policy to adjust,” said Fed chair Jerome Powell at the Jackson Hole central bank symposium, cementing expectations for a rate cut. 
• Funds, ETF investors and central banks continue to increase exposure to gold.
• Globalisation led to a long period of low inflation, deglobalisation is now likely to cause inflation as it will necessitate massive capital expenditure, especially in the West.
• The long lead up to the first US rate cut has given markets time to position themselves for it, will this turn out to be a ‘buy the rumour, sell the fact’ set-up?

Deglobalisation is now likely to cause inflation as it will necessitate massive capital expenditure, especially in the West."

Silver’s downward price trend continues, general global economic weakness weighs on sentiment

• Long term demand outlook set to improve given silver’s use in a plethora of high-tech applications.

Silver prices continue to trend lower in the face of weaker global economic activity."

PGM prices remain depressed, but weak prices are prompting a supply response that should start to tighten the fundamentals

• The PGMs face another year of supply deficits, with the deficits being filled by drawing down inventory that had built up in previous years. Its important to remember stocks cannot be drawn down indefinitely.

Gold sets fresh record highs again in August, as US rate cut anticipated 

Worse than expected US employment data in early August triggered a broad market sell-off that included a $113 per oz drop in the gold price. The weak data also strengthened the market’s conviction that the US Federal Reserve would make its first rate cut in September, with some also calling for a 50-basis point rate cut, instead of a more usual 25-basis point move. While gold’s initial reaction was negative, as investors sold gold to raise money for margin calls in less liquid markets, the secondary reaction was more in line with the development. Bad data could mean the US was heading for a recession, which could mean a rotation out of equities into safe-havens and lower interest rates would reduce the opportunity cost of holding gold, as well as weakening the US dollar – all bullish drivers for gold. As a result, after the initial sell-off to $2,364.35 per oz on August 5, gold rallied to set a fresh all-time high at $2,531.70 per oz on August 20. The three previous peaks seen in April, May and July being at $2,431.55 per oz, $2,450.05 per oz and $2,483.70 per oz. Fed Chair Jerome Powell, later cemented expectations that interest rates were set to fall when he spoke at the central bankers gathering in Jackson Hole, saying  “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks”.

Majority expect a 25-basis point Fed cut

According to interest traders using CME futures, the probability of a 25-basis point cut in the Fed target rate at the next Federal Open Market Committee meeting on September 18, was 67%, with a 33% probability for a 50-basis point cut. While 50-basis points is now less likely, gold prices have come off the boil and were trading back either side of $2,500 per oz in early September. The next potential pivot point is likely to be the release of the August jobs report on September 6. Anything that suggests a 50-basis point cut may well see gold rally further. Conversely, there is a risk that with the rate cut so long in coming, that the market has already baked in the cut and the first cut turns out to be a ‘buy the rumour, sell the fact’ setup.

The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks”

A safe haven in a troubled world

The fact that gold prices have been moving from one record high to another since the start of 2024, suggests more investors, professional money and central banks are turning to gold for its safe-haven in these troubled times. Troubled in some many ways, with wars, geopolitical tensions, social unrest, political uncertainty, currency devaluation (especially the Chinese yuan), inflation, staggering amounts of government debt, and some underperforming equity markets, as well as potentially overvalued equity markets. Gold seems once again to have become the standout safe haven, while bitcoin is failing to shine, at some 20% below its all-time high. Even the US dollar, as measured by the Dollar Index is 12% below its most recent (2022) high.

10 Sep 2024 | Categories: Gold, Silver, China, US, Platinum, Palladium

Previous article