The Gold Price Was Strong in July. Where Will it Go?

The price of gold showed strength in July and is trading near records in early August. Gold, as a precious metal, continues to be supported by strong physical demand, interest rate cut expectations and general political uncertainty. Where could the price of gold move from here?

The price of gold rose 5.2 percent in July to end the month at $2,447.6 an ounce. Gold also reached a new record high of $2,468.4 (closing price) on July 16. The intraday record came on 17th June, when gold reached $2,483.8 per ounce.

In early August, the price held high, trading at $2,440 by noon on August 5. While in dollars gold has always set new records during the last three upward impulses, in euros the price has repeatedly been in the region of 2270-2280 euros and a lateral channel can be seen. However, in dollars, the technical analysis of gold is somewhat more important and is included in the lower part of the analysis.

Whereas silver did not do so well in July. The price of an ounce was down 0.5 percent overall, and silver ended the month at $29 an ounce. The decline has continued in August, with an ounce trading at $28.3 at the time of writing this analysis.

Fed Messages and Trump’s Assassination Attempt

In the first half of July, both the speeches of the head of the Federal Reserve, Jerome Powell, and the assassination attempt of the US Republican presidential candidate, Donald Trump, helped gold to rise.

Namely, the head of the Federal Reserve, Jerome Powell, announced on July 15 that the central bank does not expect inflation to slow down to the 2 percent target before lowering interest rates. After that, the markets put the probability of a September rate cut at 100 percent. Lower interest rates are usually accompanied by a drop in US government bond yields and pressure on the dollar exchange rate. Both have a positive effect on the price of gold.

In addition, US labor market numbers came out in early August that were significantly worse than expected

The unemployment rate increased by 0.2 percentage points, and the number of new jobs was much lower than forecast. This reassured traders that the central bank is expected to cut interest rates in September. The economic indicators of the industrial sector and services also show weakness.

Two trading days after Donald Trump’s assassination attempt, the price of gold rose to a new record. This brought political uncertainty in the US as well as the rest of the world to the attention of more investors.

Gold Demand Remains Strong

At the end of July, the World Gold Council (WGC) published its second quarter gold market report, which revealed that gold demand remained at a record high in the spring. In total, global demand rose 4 percent to 1,258 tonnes, the highest second-quarter number since 2000, when the WGC began publishing data on the market.

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Central banks’ purchases and over-the-counter (OTC) transactions mainly contributed to the increase in demand. It is important to note that China’s central bank has not increased its official gold reserves for two months in a row, before that it bought gold for 18 months in a row. At the same time, both India and Poland have become active on the gold market, both increasing their reserves by 19 tons in the quarter. Turkey was in third place, buying 15 tons of gold.

In April, Shaktikanta Das, governor of the Reserve Bank of India, said,

“we are building up gold reserves and reporting these purchases from time to time.”

India’s official gold reserves have grown to 841 tonnes, or 10 percent of total reserves.

However, central banks reported only 33 percent of purchases – 67 percent were unreported. This means that China may continue to covertly buy large amounts of gold, but it is not recommended to make it public.

In the case of the gold market, it is also positive that in the western world money has started to flow into exchange-traded funds in recent months, before that there was a large outflow from funds.

Technical Analysis

Since March, gold has been strongly supported by the $2,300 level, from which the price has repeatedly rebounded. The record reached in July means that for the last three times, each increase has been accompanied by a new record that is successively higher than the previous ones. This shows the strength of the gold market, despite the fact that in June the gold market showed weakness when looking at the technical picture.

Currently, it is very difficult to predict in the short term which direction gold will move. However, it is worth noting that August and September have historically been very strong months for gold. Physical demand remains very strong and if the Federal Reserve decides to cut interest rates in September, gold could continue to show strength. So, in a few months, I rather expect that the prices will remain high or even reach new records.

At the same time, the worsening of US economic indicators is also clearly noticeable. In the next 12 months, I estimate that the probability of a US recession is higher than 50 percent.

If the recession is accompanied by some kind of financial crisis, then gold can also temporarily go down

We saw this during both the 2008 and 2020 recessions. The reason lies in the fact that turbulence in financial markets tends to create liquidity problems for financial institutions, and gold is often sold to improve liquidity.

However, these declines have usually been short-lived, and the reaction of central banks – low interest rates and money printing – tends to have a very positive effect on gold. For example, during the 2008 financial crisis, gold fell 30 percent in half a year, but then rose three times in three years.

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At the same time, it is worth noting that gold is in a clear upward trend in the long term, and it is not worth waiting for a big drop. Even if an economic crisis comes, it is not entirely certain that gold will initially become cheaper in this environment (and to what extent). And even if gold temporarily becomes cheaper, it is not known at what level this decline will occur.

For example, gold can rise to the $2,700-$2,900 range on the back of strong demand and fall back to where it is now during financial market turbulence. So one has to be very careful with market timing.