Gold continues to make historic gains

15 Eylül 2024

Gold continues to make historic gains today amid rate cut sentiment and economic pessimism

Today’s market analysis on behalf of Samer Hasn, Senior Market Analyst at XS.com

Gold headed to more historic levels today as spot prices touched $2,570 per ounce and futures on the COMEX touched $2,600.

Gold’s gains are mainly driven by more positive sentiment around multiple rate cuts in the US, and the continued negative signals flowing about the economic trajectory.

We have seen contrasting inflation data this week, whether from the mixed CPI readings or the faster-than-expected PPI. However, these figures did not change the market’s expectations about the path of rate cuts, but rather investors appear to have become more optimistic, especially as the start of the cuts approaches next week.

This is because the inflation numbers are mixed with a flood of negative data that will fuel economic uncertainty, which may justify the unprecedented brilliance of the yellow metal.

Yesterday we saw an auction of 30-year Treasury bonds. While the cover ratio was 2.4, the highest of compared to the previous two auctions, tenders fell to $52.2 billion from $57.6 billion (down more than 9%), excluding those for open market operations, according to Treasury Direct.

 

This drop in tenders comes even as interest rates are set to be cut, which could make current yields higher than those offered in the coming months. One possible factor explaining the decline is uncertainty about the outlook for long-term economic growth – which is reflected in long-term yields.

It’s not just signs of weakness in the labor market – and many other activities, such as manufacturing – that are weighing on economic sentiment, but also the ever-widening deficit.

The Treasury Department reported in its August report that the federal budget deficit widened, more than expected, to $380 billion, the highest since September 2022. The deficit reached nearly $1.9 trillion since the beginning of the fiscal year through the end of August, which represents a 24% increase from the same period in the previous fiscal year, when the deficit was nearly $1.5 trillion.

While this deficit may be heading towards further worsening amid estimates that the victory of either presidential candidate will not solve the problem, but may exacerbate it.

I think this will reduce the attractiveness of Treasury bonds, weakening their position as one of the most prominent safe assets, which naturally strengthens the position of gold. On the other hand, this hypothesis may not have any significant weight unless the deficit problem crystallizes into a real debt crisis.

All of this comes in addition to the geopolitical factors around the world that do not appear to be heading towards abating, but rather more escalation on the horizon. The war in Ukraine could escalate further, with the possibility of US long-range weapons being used to target sites deep inside Russia, which could push Moscow to further unprecedented escalation. In the Middle East, there are no signs of any imminent ceasefire agreement in Gaza, with both sides in the war clinging to their demands and adding new ones, which could leave the door open to the possibility of being dragged into a multi-front regional war. The flare-up of the conflict in Gaza nearly a year ago has been a major contributor to gold’s recovery from $1,800 per ounce.

These narratives were reflected in the remarkable return of inflows to the largest physical gold exchange-traded fund of its kind, the SPDR Gold Trust (GLD). The ETF recorded positive inflows for three consecutive sessions until yesterday, totaling nearly $650 million, the longest streak in nearly a month.

COMEX gold futures show that investors are heading towards further push to higher levels. Continuous futures open interest reached its highest level since May 2022 at 435.6K.