Gold will gain through Q4 on sovereign, safe haven buying, Fed rate cut would magnify the move – ING’s Manthey

Mon July 08 2024

Geopolitical risks, positive flows and market positioning, and sustained central bank buying are combining to push gold prices higher through the end of the year, and a Fed rate cut could push them higher still, according to Ewa Manthey, Commodities Strategist at ING.

In the bank’s monthly update, Manthey noted that gold prices have gained over 15% so far this year, and the precious metal is one of the best-performing assets of 2024.

She pointed out that the gains were driven primarily by safe-haven demand from the conflicts in Ukraine and the Middle East, along with central bank buying.“Gold traded above $2,300/oz for most of the second quarter and recorded its third-straight quarterly gain, marking its best run since the Covid pandemic,” she said.

“The precious metal set record after record in the first half of the year despite the US Federal Reserve keeping interest rates high, strength in the US dollar and divergence in US Treasury 10-year yields and ETF holdings and gold prices. We believe gold is poised to keep its positive momentum going in the second half amid the current global geopolitical and macroeconomic landscape while central bank demand is expected to grow.”

Gold is also getting a boost from rising market expectations for a U.S. interest rate cut as recent economic data supports the case for a Fed pivot.

“The Fed has held its key policy rate in a target range of 5.25% to 5.5% - the highest level in more than two decades – since last July,” Manthey wrote. “However, last week’s poor economic data has bolstered the prospect of the Fed pivoting to monetary easing as soon as September. Data from the US Bureau of Labour Statistics showed US hiring and wage growth cooling in June while the jobless rate edged up. Swap traders are now pricing in a 75% chance of a rate cut in two months.”

“Our US economist believes September is in play for a first Fed rate cut and looks for three cuts this year versus the two cuts currently priced by markets with the Fed funds down at 4% by next summer,” she added.

Manthey said that while central banks did 10 tonnes of net buying in May, sovereign demand still moderated during the month.

“May’s purchases were led by emerging market central banks with the National Bank of Poland the largest gold purchaser, followed by the Central Bank of Turkey and the Reserve Bank of India, according to data from the World Gold Council (WGC),” she said. “However, China has seen a slowdown in gold purchases over recent months. The People’s Bank of China didn’t add gold to its reserves for a second consecutive month in June.”

“We still expect central bank demand to remain strong looking ahead amid the current economic climate and geopolitical tensions,” Manthey added. “The recent WGC survey indicates that central bank purchasing will remain strong, with 29% of central bank respondents intending to increase their gold reserves in the next 12 months – the most since the WCG started a gold reserve survey in 2018.”

Global gold ETF flows also turned positive in May, with Europe and Asia driving global inflows while North America saw outflows.

“Investor holdings in gold ETFs generally rise when gold prices gain, and vice versa,” she said. “However, gold ETF holdings have been in decline for much of 2024, while spot gold prices have hit new highs. ETF flows finally turned positive in May.” She also noted that net-long positions on the COMEX moved higher month-over-month in May, which has added to the positive market sentiment surrounding the yellow metal.

ING also sees gold’s safe haven bid remaining strong for the foreseeable future, which will contribute to higher prices. “We believe that geopolitics will remain one of the key factors driving gold prices,” Manthey wrote. “The war in Ukraine and the Middle East and tensions between the US and China suggest that safe-haven demand will continue to support gold prices in the short to medium term.”

“The US presidential election in November and the long-awaited US Fed rate cut will also continue to add to gold's upward momentum through to the end of the year, in our view. Central banks are also expected to keep adding to their holdings, which should offer support.” ING sees spot gold averaging $2,300 in the third quarter before prices peak at $2,350 per ounce in Q4 for an annual average of $2,255 per ounce, with the strength continuing into Q1 2025.

Source: https://www.kitco.com/