The future of gold prices

22 Eylül 2024

The Future of Gold Prices: What Lies Beyond $2,600, and Is an Imminent Correction Ahead?

Market comment on behalf of Rania Gule, Senior Market Analyst at XS.com

Gold (XAU/USD) has seen new gains in recent sessions, surpassing the $2,600 barrier for the first time and trading near $2,613 on Friday. This rise is driven by various economic and geopolitical factors, raising questions about gold’s future as a haven amidst ongoing global tensions. In this analysis, I will explore the key factors supporting gold prices and the potential future scenarios.

From my perspective, the recent surge in gold prices follows the unexpected decision by the Federal Reserve to cut interest rates, along with expectations of an additional 50 basis points cut by the end of the year. This surprising rate cut has contributed to a decline in U.S. Treasury yields, diminishing the appeal of the U.S. dollar. In my view, the weakening dollar is a primary driver of increased demand for gold, which, despite offering no direct yield, remains attractive to investors looking to safeguard their wealth in an environment where returns from other assets are diminishing.

Beyond the rate cuts, concerns about slowing economic growth in both the U.S. and China are also key factors supporting gold’s rise. The slowdown in the world’s two largest economies signals a potential recession, driving demand for safe-haven assets like gold. In my opinion, these economic concerns, particularly the slowdown in Chinese manufacturing and weak growth indicators in the U.S., will likely continue to push gold higher in the near term. However, if negative economic conditions persist, they may place pressure on financial markets, which could limit future gold price gains.

The role of geopolitical tensions in supporting rising gold prices cannot be overlooked. The ongoing unrest in the Middle East and the Russia-Ukraine war add further instability to the markets. From my point of view, the increase in geopolitical risks strengthens gold’s status as a haven, as investors seek to shield their assets from economic and political volatility. Should these tensions continue, we are likely to see further increases in gold prices, especially given the uncertain political landscape in the U.S. ahead of the upcoming presidential election.

Despite positive U.S. economic data, such as weekly jobless claims falling to their lowest level since May and the Philadelphia Fed Manufacturing Index rising, the U.S. dollar remains under pressure. Investors seem concerned that the Federal Reserve’s aggressive rate cuts could slow economic growth in the long term, which positively impacts gold prices. This paradox suggests that markets are not confident in the dollar’s resilience amidst continued rate cuts, providing additional support for gold prices.

Another factor supporting gold is the Federal Reserve’s projections for lower interest rates, expecting them to drop to 3.4% by 2025 and 2.9% by 2026. These forecasts point to a more accommodative monetary environment in the coming years, increasing gold’s appeal as a long-term investment. I believe these projections strengthen the likelihood of sustained gold price increases over the long term, as a continued focus on rate cuts will weaken the U.S. dollar and encourage investors to seek safe-haven assets like gold.

Additionally, central banks in Asia and Russia are buying gold to reduce their reliance on the U.S. dollar. This trend reflects a strategic shift in emerging economies, which are building up their gold reserves to protect themselves from dollar volatility. In my view, this move will likely bolster gold demand in the long term, especially as political and economic tensions continue to weigh on the dollar’s status as the world’s reserve currency.

In conclusion, from a fundamental perspective, I believe gold is well-positioned to continue its upward trend shortly, supported by a weakening dollar and ongoing economic and geopolitical concerns. However, it’s essential to keep a close watch on market developments, as any changes in monetary policy or de-escalation of geopolitical tensions could trigger a correction in gold prices. Therefore, I suggest that investors and traders remain cautious about potential price pullbacks while taking advantage of opportunities if the current trends continue to support further gold price rises.