The Rise in Gold Prices Doesn’t Seem to be Slowing Down

The price of gold showed strength in August and also reached new records. Gold has been boosted by the depreciation of the dollar, the turbulence in the financial markets at the beginning of the month, and the expected interest rate cut by the Federal Reserve. The rise is predicted to continue and to exceed $2,700 in the later months of the year.

In August, the price of gold increased by 2.3 percent and ended the month at $2,503 per ounce. In the first days of September, the price has moved sideways and is trading at $2,505. Also, on August 27, gold rose to a new record – $2,524.4 per ounce.

In the short term, gold has been helped to reach new highs by the fact that the markets became fully convinced that interest rate cuts will start in the US already in September. In addition, gold has been supported by the depreciation of the dollar and the turbulence of the financial markets at the beginning of August. There is also growing concern about a possible economic downturn.

Also, a very important development is that Western institutional money has started to flow into gold, which could help the yellow metal move even higher.

Investors are Waiting for the Decision of the US Central Bank

Investors are now eagerly awaiting the Fed’s September meeting. At the meeting of central bankers in Jackson Hole at the end of August, the head of the central bank, Jerome Powell, announced that the upside risk of inflation has decreased, and the risks of a worsening of the labor market situation have increased.

“It is time to adjust monetary policy accordingly,”

he summed up the situation

Markets are now fully convinced that the Federal Reserve will decide to start cutting interest rates on September 18th. CME’s FedWatch tool reflects how likely various central bank decisions are considered to be. The probability of an interest rate cut of 0.25 percentage points is considered 61 percent, while the probability of a 0.50 percent cut is 39 percent, according to the markets.

The probability that the central bank will even cut interest rates by 0.5 percent has grown rapidly in recent weeks. Until a few months ago, the probability of this was considered close to zero.

What Happens After the Fed’s Decision?

The gold market has been trading in a fairly tight range since hitting records in the second half of August and early September, suggesting that many market participants are waiting for a decision from the Federal Reserve before making trades.

So, it is likely that the gold market will move more once the decision is announced. If the central bank decides to lower interest rates more than expected (by 0.5 percentage points), then we may see gold rise, because currently the markets have factored in a smaller interest rate cut (0.25 percentage points). Therefore, if the main expectation is fulfilled (a 0.25% cut), gold may move slightly downwards, but probably the decline will not be large, because the interest rate decline cycle has a positive effect on the price of gold in the medium term.

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Expectations regarding interest rates have also made the dollar exchange rate cheaper. The dollar index (DXY) is down more than 4 percent from June highs. A falling dollar supports gold because it makes gold cheaper for users of other currencies.

Gold Demand Remains Strong

The physical demand for gold continues to be strong, and central banks also became active in the market again in July. We can also see a very important trend where Western institutional money has started to flow into gold.

The World Gold Council (WGC) published the second quarter gold market report at the end of July, which I wrote a little more about in the previous gold market analysis. The report found that global demand for gold rose 4 percent year-on-year to 1,258 tons, the highest level since data on the market began to be collected in 2000.

In early September, the WGC reported that gold purchases by central banks in July were the largest since January of this year.

The largest buyer was the Polish central bank, which acquired a total of 14 tons of gold

To date, the share of gold in the reserves of the Central Bank of Poland has increased to 15 percent, but the goal is to bring it to 20 percent.

While there was an outflow of gold from exchange-traded funds (ETFs) in the West last year and early this year, now we can see a reversal of this trend. Funds backed by physical gold have now been inflowing for three months in a row, mainly due to increased interest in gold among Western investors. For example, in July, US investors made more investments in ETFs than European and Asian investors, according to the latest data from the WGC.

This is a very important trend change because it shows that Western institutional money is now flowing into gold. I expect this to help gold hit consecutive new highs in the fall. I continue to believe that gold will reach $2,700 an ounce before the end of the year.