A New Wave of Inflation Would Make Gold Shine Again

The gold market, a crucial investment avenue for many, has been experiencing fluctuations influenced by various economic factors. As the Federal Reserve signals potential rate hikes and with global economic conditions evolving, the trajectory of gold prices remains a topic of significant interest. This article delves deep into the recent trends in gold prices and the numerous underlying factors, offering insights into its future trajectory.

The price of gold was on a downward trend last summer, but the fundamental picture is keeping prices strong. I continue to expect gold to break the $2,000 barrier again at the end of this year or in the first half of next year, and to challenge the record highs reached in May this year ($2,082).

In the first half of August, gold came under heavy pressure as the Federal Reserve started to talk about further rate increases. The price fell to $1,885 an ounce by mid-August, its lowest level since March this year. Prices then started to recover again.

In August, gold depreciated by a total of 1.3 percent to end the month at $1940 an ounce. In September, prices started to fall again, and by midday on September 13, an ounce of gold was trading at $1,910.

Despite hitting a five-month low in mid-August, gold continues to show strength. The price has fluctuated in the $100 range (1885–1985) since May and has remained fairly stable, which is a positive signal.

Looking at the technical picture, support levels have emerged for gold in the short term around the USD 1900 level. Stronger resistance remains around the 1930–1950 dollar level. Above this level, we could quickly see the $2000 level again.

Central banks have reached a crossroads

Looking at the short-term picture, gold prices are currently most affected by central bank decisions. The most important question is whether or not the Federal Reserve decides to raise interest rates this year. Markets expect the central bank to leave interest rates unchanged at its meeting on September 20. However, the first rate cuts are expected in spring 2024, according to a Reuters poll. Twenty percent of respondents expect another rate hike this year.

If the central bank decides to raise rates again this year, this would have a negative impact on gold prices. This would imply a general rise in interest rates and put downward pressure on government bond prices (if their price falls, yields rise, and vice versa). This in turn would increase the opportunity cost of gold, which does not pay interest. The decision could take the gold price to a support level of around USD 1800 per 1 troy ounce.

However, the likelihood of a rise in interest rates is currently rather low. In the US, inflation has come down considerably, and the economy is rather cooling. I believe that, despite the tougher rhetoric, the Federal Reserve will let things settle down and wait to see what the longer-term impact of the interest rate hikes of the past year and a half will be.

In Europe, the situation is somewhat different. The European Central Bank has left the next rate hikes open; the next decision will be taken on 14 September 14, and markets put the probability of a 0.25 percentage point rate hike at 35%.

A rate hike by the European Central Bank would likely mean a strengthening of the euro against the dollar, which in turn would put downward pressure on gold prices in euros. In dollar terms, however, it could be positive for gold.

In addition to the actions of central banks, gold market investors are also keeping an eye on China. The real estate market there is falling rapidly, and there is speculation that this could grow into a financial crisis that spreads outside the country.

The fight against inflation is not over

While there has been talk over the last six months that the battle against high inflation has been won and that this worry can soon be put behind us, I believe that this is not the case. Temporarily, inflation may still come down and we may even see deflation, but the long-term picture is in favour of inflation.

If you look at the commodity and energy markets, we are still in the early phases of a long-term upward cycle. Although oil prices have fallen for almost a year in a row since last summer, they have now started to rise again. For oil, as for many other commodities, the fundamental picture continues to be supportive of a long-term upturn.

In addition, the world population is ageing, deglobalisation is taking place, and labour shortages remain an acute problem. In my view, these factors show that we will not get rid of inflationary pressures easily.

Of course, we should not forget the record levels of debt, both public and private. As interest rates have risen, servicing them has become increasingly difficult, and in the end, the inflationary route is usually chosen to solve this problem. This means that, when problems arise, they are temporarily solved by printing money and borrowing money. Again, this is inflationary.

What will happen to the price of gold?

Longer-term inflationary pressures should also provide support for gold. It is noteworthy that gold has managed to remain relatively high despite interest rate rises and the slowdown in inflation. Fundamental support has been provided by central bank gold purchases as well as generally strong physical demand.

Although gold could experience a temporary fall in prices in a possible economic downturn, it is unlikely to be very deep, and the recovery would be as rapid as in 2020. However, if gold were to fall to last year’s lows of $1,615 an ounce, I see it as an extremely attractive place to buy. You can read more about the impact of the recession on the gold price in last month’s gold market summary.

Overall, I expect that we will not see the $1615 level again and that gold will cross the $2000 level again in the second half of this year or early next year.

Silver has formed a strong support level at $22.5 in recent months, where buying interest is strong. In the first half of August, silver, like gold, fell sharply, but prices recovered in the second half of the month. In September, silver fell again and is currently trading at $22.8 an ounce.

Silver has a strong resistance level at $25-25.2 and at $26, the latter being the peak reached in May this year. However, there is also strong physical demand for silver, and the market is in its biggest deficit in several decades. While it is currently possible to cover this shortfall from inventories, if the shortfall persists (especially this year and next), it should start to be reflected more strongly in prices.

The future of gold remains an intriguing subject of discussion, with central bank decisions, inflationary pressures, and global economic health playing pivotal roles. While the gold market has its bouts of volatility, its long-standing allure as a safe haven during uncertain times remains unchanged. Investors and market watchers should remain vigilant to these factors as they navigate the complex world of gold investments.