Precious metal: An illustration of gold bars and coins. The outlook on gold remains constructive but in the near term, there may be some volatility, say experts.
PETALING JAYA: The gold price is at a historic high despite lower inflation, with analysts anticipating falling interest rates and real yields will continue to boost the allure of the precious metal to investors.
US Federal Reserve (Fed) chairman Jerome Powell’s “time has come” keynote speech at the Jackson Hole symposium recently gave markets greater conviction that the Fed rate cut cycle is upon us.
“Broader term, the outlook on gold remains constructive but in the near term, there may be some volatility as markets have largely priced in the Fed rate cut expectations.
“So there are still some two-way risks for gold as we inch closer to the Federal Open Market Committee meeting on Sept 18 when the focus is on the dot plot and the press conference for guidance on where the Fed is in terms of its rate cut trajectory.
“Any disappointment may see prices of gold correcting lower, while a dovish guidance should keep gold supported,” said Christopher Wong, foreign-exchange strategist at OCBC.
Although the Fed chair left out specifics in terms of magnitude and pace of cuts, the Fed fund futures are pricing in a 100 basis point (bps) cut this year and another 120 bps next year.
The yellow metal withstood the Black Monday panic selling in early August and bullish investors and traders have led gold to test US$2,531 a troy ounce last week before ending the trading week at US$2,503, up significantly from the year-to-date low of US$1,984.
Price charts showed gold has been on an upward price trajectory for over 20 years.
Wong said historical evidence since 2001 also showed that gold strengthened when the Fed rate hike cycle ended and continued to extend its bullish run when the Fed rate cut cycle gets underway.
Wong highlighted that there had been only specific periods over the last 20 years when gold prices had fallen, for instance, during the taper tantrum in 2013 as well as past periods of Fed hike cycles.
Gold’s current northward price trajectory comes despite a weaker greenback and cooling inflation, raising doubts about its inflation hedge role but Wong said the relationship still holds over the long run.
“In the long run, gold can be perceived as an inflation hedge somewhat but in the near term, gold prices can be driven by market and macro dynamics, including interest rate cycles, opportunity cost and geopolitics,” Wong explained.
Apart from investors piling funds into gold exchange-traded funds, central banks have been net buyers of gold for a while. They now hold more than 35,000 tonnes of the metal, about a fifth of all the gold ever mined.
Wong said central banks bought gold for several reasons, including diversification of their reserve portfolio and as a strategic reserve asset. He foresees some to remain net buyers.
“It’s likely the usual central banks in Asia including China, India and Turkiye should continue to add to their reserves. According to an Official Monetary and Financial Institutions survey conducted with reserve managers in June, 15% of respondents still expect to increase their exposure to gold,” Wong told StarBiz.
