Gold Prices Hit New Highs: $3,000 Possible?

Boosted by expectations of further interest rate cuts by the Federal Reserve and escalating tensions in the Middle East, international gold prices have reached new highs once again.

On September 20th, spot gold closed up by 1.4%, at $2,621.96 per ounce, breaking through the $2,600 per ounce mark for the first time; U.S. gold futures rose by 1.2%, with a settlement price of $2,646.20 per ounce. On September 23rd, spot gold once again broke through $2,630 per ounce, continuing to set new historical records.

This year, spot gold prices have been climbing steadily, soaring from the beginning of the year at $2,000 per ounce, fluctuating around $2,400 per ounce from May to July, breaking through the $2,500 per ounce mark in mid-August, and then breaking through $2,600 per ounce a month later. The Federal Reserve's 50 basis point interest rate cut marks a gradual shift into a loose monetary environment globally, further increasing the attractiveness of gold to capital.

Under the wave of interest rate cuts, Wall Street institutions are currently optimistic about gold prices, and the future question seems not to be whether it will rise, but rather, how high gold can actually go?

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Why has the international gold price repeatedly hit new highs?

This year, international gold prices have set new records more than 20 times, successively breaking through the $2,100, $2,200, $2,300, $2,400, $2,500, and $2,600 per ounce milestones, with a nearly 30% increase within the year.

Zhao Wei, Chief Economist at Shenwan Hongyuan Securities, told reporters that central bank gold purchases may have been a significant driver behind the first wave of increases this year. In the first quarter of 2024, global central banks collectively purchased 299.9 tons of gold, significantly accelerating compared to the fourth quarter of 2023. Since central banks typically buy spot gold, and spot gold trading is concentrated in the London and Zurich markets, transaction and export data can also confirm the role of central bank gold purchases in driving the price increase during this period. In terms of transactions, a breakdown of the time data for the gold price increase from February 14th to April 17th shows that during this period, gold prices often rose sharply during the independent European trading hours; in terms of export data, the total gold export volume of Switzerland and the UK in the first quarter reached a historical high of $55.31 billion.For the recent second wave of increases, Zhao Wei believes that the release of investment demand under the backdrop of falling US Treasury yields is the main reason. Since the second quarter, central bank gold purchases have slowed marginally, but the investment demand catalyzed by falling US Treasury yields has taken over the "baton". Under the guidance of the June interest rate meeting dot plot and other indicators, the last wave of "interest rate cut trading" before the interest rate cut has begun. Since June 10th, the nominal interest rate and real interest rate of 10-year US Treasury bonds have respectively fallen by 74 basis points and 58 basis points. The significant decline in US Treasury yields has stimulated the release of gold investment demand. From June to August, investors in North America, Europe, and Asia have increased their gold holdings by 34.6 tons, 42.3 tons, and 12.1 tons, respectively.

Wang Yi, Chief Economist of Great Wall Securities, analyzed to 21st Century Economic Report reporters that there are three leading factors for the record high of spot gold. The first is the Federal Reserve's unexpected interest rate cut of 50 basis points, the decline in dollar risk-free interest rates, and the phased weakening of currency value, highlighting the international monetary value of gold; the second lies in the market's doubts about the subsequent economic recession in the United States. Although the capital market has temporarily shown a trend of economic recovery after a preventive interest rate cut - the bear steepening of US Treasury bonds, the catch-up of US stocks, and the recovery of commodities, it still needs to be verified whether subsequent US employment and manufacturing PMI and other economic data can stop falling and rise; the third lies in the high uncertainty of the US election, the tense situation in the Middle East, such as Lebanon, and the value of gold's risk-avoiding attributes is also highlighted.

In addition, after India lowered the gold import duty this summer, the demand for gold jewelry and bars among Indian consumers has surged, which has also become a key force in driving the gold price to a new high. Data released by the Indian government shows that in August, India's gold import value reached a historical high of $10.06 billion, calculated in US dollars.

Is there a gold price bubble?

As gold prices have repeatedly hit new highs, some concerns have also emerged in the market, such as high real interest rates, but gold prices do not fall but rise.

Zhao Wei analyzed that since 2022, gold prices have significantly deviated from real interest rates, showing a large gap. If only considering real interest rates, the current reasonable position of gold prices may be between $800 and $1,200 per ounce, but central bank gold purchases may be an important explanation for this gap: under the traditional framework, investment demand dominated by inflation and opportunity cost has formed the gold price, which basically conforms to the real interest rate framework; since 2022, the scale of central bank gold purchases has increased significantly, bringing the demand curve outward, and thus leading to the widening gap between gold prices and the real interest rate center.

After the US and Europe initiated SWIFT sanctions against Russia, concerns about sanctions and preventing changes in the monetary system may have become a reason for some countries to manage their foreign exchange reserves. As of July 2024, the proportion of gold in foreign exchange reserves in countries such as China, India, and Japan is still relatively low, and there is still room for gold purchases.

The rhythm of gold purchases under the "passive reduction" of US Treasury bonds is also expected to be maintained. Zhao Wei analyzed that the rhythm of gold purchases by central banks such as Russia is related to the rhythm of US Treasury bond reduction. Before December 2025, the scale of medium and long-term US Treasury bonds maturing is still increasing, and the "passive reduction" type of non-renewal upon maturity is expected to continue, and the rhythm of gold purchases based on this is also expected to be largely maintained. However, even if there is still "room," central bank gold purchases may also smooth the rhythm to prevent gold prices from rising too quickly.Historically, the monthly percentage change in gold prices is closely related to the monthly percentage change in the real interest rates of 10-year U.S. Treasury bonds, with a stable negative correlation over the long term. Since August 2022, this negative correlation has remained significant, and investment demand in Europe and America is indeed dominated by the real interest rate framework.

Zhao Wei analyzes that there is still some uncertainty in the future trend of U.S. Treasury bond rates, and it is important to pay attention to the possible trend of these rates after the election. Under the Trump policy scenario, the advancement of "tariff increases" could drag the U.S. economy towards a recession. Under a "recession trade," U.S. Treasury bond rates would still fall, which would be bullish for gold. Under the Harris policy scenario, her subsidy policies for residents might support the resilience of U.S. consumption. If a "recovery trade" begins, it could constrain the upward movement of gold prices.

Is $3,000 not a dream?

The luster of gold is becoming more and more dazzling, and it is almost certain that it will continue to rise in the coming period.

Even with a nearly 30% increase this year, institutions still generally have a positive outlook on gold prices. Commerzbank believes that the expectation of further rate cuts by the Federal Reserve in the coming months will keep gold prices on an upward trend, and as long as these expectations persist, gold prices should continue to rise.

Bank of America strategist Michael Hartnett said that with the arrival of a new round of the Federal Reserve's easing cycle, the risk of bubbles in some markets is coming again. The best way to allocate investment portfolios is through bonds and gold to hedge against growth and inflation risks.

Citi Research's head of North American commodities, Aakash Doshi, even predicts that by mid-2025, the price of gold could reach $3,000 per ounce, driven by Federal Reserve rate cuts, strong ETF demand, and off-exchange physical demand.

However, after a continuous surge, investors still need to be cautious about the risk of gold price corrections in the short term. Christopher Wong, a foreign exchange strategist at Oversea-Chinese Banking Corporation, is bullish on gold but says he will choose to be cautious in the short term.Moreover, the Federal Reserve is not a monolithic entity, and different interpretations of data have also led to significant disagreements. On September 20th, Federal Reserve Board members Waller and Bowman spoke publicly for the first time after the Fed's 50 basis point rate cut, reflecting a substantial divergence within the Fed on the magnitude of action.

Waller stated that he supported the 50 basis point rate cut because the decline in U.S. inflation was faster than he had anticipated. As a result, the Fed had more room for easing when shifting to support a weak labor market.

In contrast, Bowman, who cast the only dissenting vote, indicated that she did not agree with the Fed's 50 basis point rate cut, preferring a 25 basis point reduction instead, as inflation remains above the 2% target level. This could lead the public to believe that the Fed has prematurely declared victory over inflation. It is necessary to move cautiously towards a more neutral policy stance to ensure that inflation falls to the 2% target and to avoid unnecessarily stimulating demand.

Looking ahead, Wang Yi analyzed that under the expectation of a rate-cutting cycle and a soft landing, the U.S. dollar may depreciate in phases, and international gold prices may strengthen in stages. If the rate-cutting cycle moves into its latter half and the expectation of a soft landing is verified, the dollar may regain strength, and gold prices may reach a phase peak. The verification of this round of a soft landing in the U.S. still requires 1 to 2 months, with attention to economic data such as PMI, employment, wages, and retail. Before that, gold may still have some room for a slight increase.