Record-breaking gold surge amid Fed rate cut anticipation

On Wednesday morning, one ounce of gold cost as much as €2,418. This is over €29 more than 20 May, when its price set the previous record. Considering historical correlations with prices of other assets, gold has been overvalued for some time. Despite this, it is hard to find an analyst today who believes that gold has poor prospects.

Since the beginning of the year, gold has risen by 20%, most notably from February to April. Since then, its price has been relatively stable, although it temporarily climbed to a new record in May. The latest surge, lasting roughly three weeks, has broken gold out of this sideways drift. Precious metal is over 5% more expensive than three months ago.

On Monday, Federal Reserve Chairman Jerome Powell said the last three inflation readings increased the Fed's confidence in a sustained return to its inflation target.

After this data and Powell’s speech, expectations for a Fed rate cut increased. The analyst explains that the market now assesses the probability of the Fed deciding on this at its September meeting at 98%, compared to just over 70% a week ago. Additionally, the yield on U.S. Treasury bonds has significantly decreased to levels last seen in March.

Real interest rates, such as the 10-year Treasury Inflation-Protected Securities (TIPS) yield, have also fallen. In July, it dropped below 2%.

How much growth potential does the price of the yellow metal have? One of the most optimistic forecasts was recently made by analysts at the American bank Citi. According to them, in the second half of 2025, gold could cost between €2,740 and €2,931 per ounce, up to 20% more than today. They believe this would be consistent with the behaviour of gold and other precious metals during previous cycles of monetary easing. Usually, six months after the first rate cut, precious metals were 13% more expensive.

Analysts at the French bank Societe Generale have maintained their forecast since spring, stating that gold could cost €2,680-€2,704 per ounce at the end of 2024. Experts at American Goldman Sachs hold similar expectations.

Analysts at another American bank, J.P. Morgan, are more cautious. In a recent analysis, Gregory Shearer, chief strategist of the base and precious metals markets at J.P. Morgan, claims the direction of travel in the coming quarters will remain the same. We predict that in the fourth quarter, the price of gold will average €2,430 per ounce, and in 2023, it will average €2,525. We see a risk that these targets will be reached earlier.

Historically speaking, fluctuations in real interest rates were indeed one of the main forces shaping gold prices. The higher they are, the less profitable it is for investors to hold gold, which bears no interest. But in the last few years, this correlation has significantly weakened. The cycle of monetary tightening that began in 2022 in major economies led to an increase in real interest rates, which only briefly discouraged investors from gold. As early as the fourth quarter of that year, the price of the precious metal surged, and in 2023, the metal became more expensive by more than 13%.

This unusual behaviour of gold has caused its price to deviate from what one would expect at today's real interest rate levels. Hence, some analysts have assessed that the metal is overvalued by a few or several percent. This argues for price stabilization, at least in the short term, even if real interest rates continue to fall. Such are, for example, the expectations of Nitesh Shah, a commodities strategist at WisdomTree, cited by Reuters on Tuesday. According to him, the sideways trend will continue until the end of the third quarter, and gold prices will increase.

On the other hand, if we compare the price of gold with stock prices, the metal seems heavily undervalued. Stocks rise when investors show a high appetite for risk, that is, high optimism. In such circumstances, gold, known as a haven for capital during market turmoil, usually fares poorly. But again, in recent years, it has been difficult to spot this regularity. The main index of the American stock market, the S&P 500, experienced two years of spectacular gains, which did not prevent a boom in the precious metals market. In recent days, stock and gold prices have also been rising.

Given these disturbances in the historical relationships between gold prices and other assets, the consensus among analysts that the metal should continue to rise may be surprising. An explanation for this state of affairs can be sought for why these relationships have weakened.

The price of gold diverged from real interest rates soon after Western countries imposed sanctions on Russia for its attack on Ukraine. Among these sanctions was freezing part of Russia's foreign reserves held in U.S. bonds. This influenced the decisions of other central banks, particularly from emerging markets, regarding the allocation of foreign reserves.

The result was a massive increase in central bank demand for gold. In 2023, institutions monitored by the World Gold Council (WGC) bought 1,170 metric tonnes of the precious metal, more than ever before, excluding 2022. Then, central banks added 1,170 metric tonnes, the most in history.

Gold is being purchased primarily by the central banks of countries that do not have good relations with the USA and other Western nations. However, others, including the National Bank of Poland, are also increasing their gold reserves. This is a reaction to the uncertain and tense geopolitical situation. Many other investors think similarly.

Analysts expecting further rises in the price of the precious metal often point out that this uncertainty will persist until the presidential elections in the USA, scheduled for November, but possibly even longer. Donald Trump, currently the favourite in the White House race, promises, among other things, widespread tariff increases on imports to the USA, which will lead to strained relations between Washington and even its allies. Additionally, it is unclear to what extent the Trump administration would be involved in defending Ukraine.

The accumulation of structural factors driving up the prices of real assets like gold, including concerns about the U.S. budget deficit, asset diversification by central banks, portfolio protection against inflation, and a foggy geopolitical landscape has pushed the precious metal to new records despite a strengthening dollar and relatively high U.S. bond yields. Many of these factors will persist regardless of the outcome of the November elections, as assessed by Natasha Kaneva, chief commodities market strategist at J.P. Morgan, in a recent report.