Gold at new record highs

17 Temmuz 2024

Gold at new record highs with certainty around a rate cut and uncertainty with Trump’s potential return

Today’s market analysis on behalf of Samer Hasn Market Analyst and part of the Research Team at XS.com

Today, gold reached more historical highs in the Asian session after exceeding $2,482 per ounce, while COMEX futures exceeded $2,487.

Gold’s gains come with the market’s near certainty that the Fed will cut interest rates in September, in addition to the political and economic uncertainty with the possible return of Donald Trump to the White House.

The Fed’s comments, following a faster-than-expected slowdown in inflation, have raised sentiment about the possibility of an interest rate cut in September, since attention has been drawn to this month as the starting point for a less tightening path for monetary policy.

This intense optimism has pushed 10-year Treasury yields to the lowest levels since mid-March, which appears to be one of the key drivers fueling gold’s gains.

According to the CME FedWatch Tool, the probability of a 25-basis point cut in September is more than 90%, and the markets also expect a probability of more than 50% that we will see another cut next November or December.

Gold’s gains are further supported by high global uncertainty which appears to be fueled by the potential return of Donald Trump.

Although his return to the White House may contribute to fueling inflation with the return of heavy customs tariffs and tax cuts, which in turn may cause harm to gold as bond yields rise and interest rates remain high for a long time, the structural political and economic change upon his return may raise uncertainty locally and globally, according to the International Monetary Fund (IMF).

With the expected economic policy shift that may come with Trump, we may see inflation return to rise in 2025, according to the Fund, and this may dispel monetary policy makers’ expectations of the possibility of returning inflation to its target in 2026. In other words, a longer period of monetary tightening.

This rise in inflation and reduction in tax revenues may lead to a widening of the worsening deficit, which the Fund expressed fears of a sustainable rise. This worsening deficit may push borrowing costs higher, which will slow growth and investment, according to the Fund.

Also, if we take Trump’s promises regarding pressure to remove Jerome Powell and lower interest rates for a purely political or personal motive, this will have disastrous repercussions on various aspects. Among the most important of these consequences, in my opinion, is the deterioration of confidence in the Federal Reserve System, which may extend to the money markets, which may revive the flows of investor funds towards gold, which are now heading to bonds and stocks. Add to these consequences the possibility of igniting inflation in an unprecedented manner in conjunction with tax cuts and customs tariffs.

If the Federal Reserve, which relies on data, quantitative models, and risk assessment in making the decision to move the interest rate, had previously erred in its estimate of the path of inflation, how could Trump be more correct than the Fed and simply promise to lower the interest rate? This is nothing more than populist rhetoric stemming from political interests with disastrous consequences. Let us not forget the Turkish scenario in this regard specifically. Even raising the interest rate to 50% there has not been enough to curb inflation so far.

The Fund also spoke of fears of an increase in the deficit in France with the new composition of Parliament, while the new policies that will be taken are not expected to lead to a significant reduction in borrowing.

This comes after the uncertainty caused by the results of the recent elections, with the state of severe partisan polarization between the very contradictory trends between the far right and the left.

All of this comes even as the difficulties facing major economies so far are fueling uncertainty. In China, a report in The Washington Post talked about the deteriorating in the housing market in China and how it has caused a huge amount of savers’ wealth to be wiped out on an ongoing basis until now, with millions of empty or unfinished apartments left with no one to buy them.

The report talked about the uncertainty among individuals, which prevents them from consuming or investing. Individuals will also be more reluctant to buy homes after the continuous losses they are exposed to with the decline in the value of their investments in which they put their savings.

Even though, support for the housing market is not expected to feature prominently at the Third Plenum of the ruling Communist Party, which meets every five years to discuss economic issues. On the other hand, the government’s main goal now is to support China’s trend to be a technological and scientific pole, according to The Post.

This state of uncertainty, with the fading appeal of housing investment, may make gold shine more brightly among individuals, which may prompt them to increase their holdings of gold coins, and this, of course, would preserve the yellow metal’s gains.

This momentum to buy gold among individuals, especially young people, is not new and was discussed in several reports earlier this year, which comes with the People’s Bank of China’s huge holdings of bullion, which the markets are awaiting to resuming after the subsequent suspension of buying for 18 consecutive months.

In the Middle East, the continued fears that the ongoing conflict there will spiral out of control maintains gold’s position as a safe haven in this type of crisis, with no immediate horizon for resolving the wars there, which coincides with global economic and political uncertainty.

It does not seem that the conflict in Gaza may take a turn towards an immediate settlement, despite the news about Hamas easing its conditions regarding ensuring a sustainable ceasefire, or Israel discussing its withdrawal from the areas adjacent to the Egyptian border, which was reported by The Wall Street Journal, or reaching an agreement on framework between the two parties, according to an opinion article in The Post the previous week.

According to Axios, Benjamin Netanyahu is moving to try to fix the relation with Donald Trump ahead of his return to the White House. This comes as a bet on changing the position of the United States and directing greater support to Israel, in addition to stopping pressure to ease ground operation or even condemnations and rebukes.

Accordingly, the course of negotiations – which does not enjoy the support of the extreme right in Israel – may witness further procrastination or deterioration with Netanyahu betting on a free hand in the region upon Trump’s return. This, in turn, may maintain fears that the conflict will ignite beyond its current borders, which may extend outside the region.

Zaid Barem / YMM