Gold’s record-breaking price rise continued in the third quarter of the year, with the yellow metal soaring above US$2,600 per ounce for the first time in September and then moving even higher.
Critical support for the precious metal came in the form of a 50 basis point interest rate cut by the US Federal Reserve on September 18. Speaking about the much-anticipated reduction, Chair Jerome Powell cited better balance as the once-hot labor market showed signs of cooling and inflation eased closer to the central bank’s 2 percent target.
Adding fuel to gold’s momentum was geopolitical uncertainty, which pushed some investors to seek out safe havens. The main contributing factor was the escalation of tensions in the conflict between Israel and Gaza.
Read on for more on gold’s Q3 price drivers and what experts see coming in the months ahead.
Gold started Q3 at US$2,332.30, quickly moving higher to set a new record of US$2,468.30 on July 17.
Its momentum was fueled by speculation that the Fed might cut rates at its July 30 to 31 meeting.
Gold finished the month at US$2,445.70 on July 31.
He gave his most clear indication that a rate cut was on the way, saying, “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
The question was answered after the Fed’s September 17 to 18 meeting, when officials made the decision to slash rates by 50 basis points. In the immediate aftermath, the gold price saw increased volatility; however, the precious metal stabilized and then gained momentum, pushing through the US$2,600 threshold.
While lower rates tend to be positive for gold, the biggest story of the year is still central bank buying.
In an email to INN, David Barrett, CEO of global brokerage firm EBC Financial Group, also suggested that Fed rate cuts are currently less of a factor for gold than central bank buying. “I still see the global central bank buying as the main driver — as it has been over the last 15 years. This demand removes supply from the market. They are the ultimate buy-and-hold participants and they have been buying massive amounts,” he said.
Additionally, Barrett suggested that even if China’s gold buying has slowed down, Turkey, India and Kazakhstan have all continued to purchase at elevated levels, taking up some of the slack.
Both Tiggre and Barrett added that geopolitical uncertainty, especially escalating tensions in the Middle East, could be a driving force that pushes investors toward gold as they seek more security in their portfolios.
With gold continuing to hit record-high prices, Barrett expressed surprise that there hasn’t been more movement on the M&A front, but offered some potential reasons why it’s taking time to kick in.
“I suspect the main reason is the massive rise in production costs and higher interest rates — making capital expenditure in a capital-intensive sector a large drag on the share prices,” he explained. “Labor, energy and raw material costs have all risen significantly. Maintaining a mine requires huge upfront investment — the rise in global interest rates, from historically very low levels, means the higher returns from gold prices are still being eaten into by the running costs.”
Tiggre sees an increase in M&A activity as inevitable. “Producers that haven’t been exploring much need to buy viable deposits or they’ll mine themselves out of existence. And historically, yes, that trickles down to exploration,” he said.
This point was echoed by Barrett. “I suspect we will see more consolidation in the sector. The miners with the larger, better-funded balance sheets will look to take advantage of merging operational costs,” he said.
Both Tiggre and Barrett see gold continuing to rise through to the end of the year.
“It ‘feels’ to me that the momentum is growing stronger. Despite the nominal all-time highs this year, the market doesn’t feel ‘toppy’ yet. So, I expect higher (prices) this year, and probably next year, depending on whether or not gold gets ahead of itself this year,” Tiggre said in his email to INN.
He noted that conflicts in the Middle East and between Russia and Ukraine could boost gold, but also noted that the upcoming US election could provide a leg up for the metal. “Both mainstream candidates’ promises are inflationary. That’s bullish for gold, whoever wins. When the election is contested — which it almost certainly will be — it depends on whether the situation boils over into major social unrest. That would likely scare people into safe-haven assets like gold. Short of that, the damage to the social fabric of the US will take longer to play out,” Tiggre explained.
Barrett noted that he sees gold being driven not by speculative interest, but by demand from buy-and-hold players. That suggests the market “has reached a point where any selling or hedging is simply swamped.”
He added that gold’s current price level poses a challenge for the average trader.
“Having the confidence to continue to buy after the huge moves seen at these levels is hard. We have seen much more two-way flow since we broke US$2,400; trader confidence to buy and hold is lower,” he said.
Like Tiggre, Barrett anticipates considerable risk in the coming months. “From a market perspective, the election could affect all risk buckets in a material manner. The direction of global conflicts, particularly in the Middle East and Ukraine, seems to hinge on who is the next president. The same could be said for political relationships, especially with China, progress on trade, tariffs and economic stimulus continuing,” he explained via email.
Ultimately, Barrett sees a higher gold price coming as geopolitical and economic uncertainty leads to increased pockets of volatility and demand from central banks continues to support the market.
Securities Disclosure: I, Dean Belder, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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