(News Bulletin 247) – The precious metal has pushed back its records this week, driven by hopes of rate cuts from the American Federal Reserve. Experts are a little divided on what will happen next, whether this increase will be a breather or a continuation. The impact of a potential victory by Donald Trump in the American presidential election is also not obvious.

Gold is emerging as the stock market asset not to be missed this year. The precious metal pushed back its historical records on the market this week, reaching as high as $2,483.73 per ounce.

Since the beginning of the year, spot gold prices have gained 20% per ounce by mid-week, before falling back to +17%.

. But the gold metal is outperforming most stock markets, with the exception of the Nasdaq and Japanese indices.

While there is no exact definition of a “bull market” – a market in a phase of very strong growth, like the upward movement of a bull when it attacks – a progression of 20% can be considered as such.

The movement has accelerated especially since the publication of slightly lower-than-expected US inflation figures last week. These data have fueled speculation of rate cuts by the US Federal Reserve (Fed) starting in September, allowing gold to gain more than 4% over the following sessions.

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Rate cuts expected

“The markets are now anticipating a drop in US interest rates for September, following the rather moderate inflation figures. A trend reinforced by comments from President Jerome Powell which seem to indicate that the US central bank could soon lower its rates, which is traditionally favourable to the yellow metal,” explains Laurent Schwartz, president of Comptoir nationale de l’or.

Let us recall that the evolution of gold on the market is supposed to be driven by the reductions in key rates and therefore interest rates. The higher the interest rates, the less theoretically gold is attractive, all other things being equal. Unlike stocks (with dividends) and bonds (with coupons), gold does not produce income. Its price is consequently knocked around by a rise in interest rates, because it then becomes less and less interesting to invest your money in gold rather than to place it.

Investors are currently expecting rate cuts of 75 basis points, or 0.75 percentage points, and are giving a 98% probability to a first reduction in September.

These expectations of rate cuts have another, more indirect effect: they pull the dollar down. The euro, for example, has recovered well against the greenback, gaining 2.4% since the end of June, a significant movement on the foreign exchange market. But the lower the dollar, the less expensive it is for investors, whose reference currency is not the dollar, to buy gold. Clearly, a fall in the dollar supports gold (like most raw materials) all other things being equal.

Other factors that have pushed gold this year include purchases by major emerging central banks, led by China, strong physical demand (coins, bars), particularly from Chinese investors looking for alternatives to local stocks and a struggling real estate market, or to cope with geopolitical tensions.

Towards a breath?

But as in any stock market rally, the question is obviously whether gold can extend its upward movement.

“While gold remains our darling asset and offers solid returns, a rapid 10% rise in the space of two weeks may be a bit too much,” said Stephen Innes of Spi Asset Management, who believes a breather is warranted.

Bloomberg, for its part, notes that certain technical signals indicating that gold is “overbought” have been crossed.

On the contrary, UBS considers that gold still has room to progress, judging that physical demand for gold should increase, even with higher prices, between the end of the third quarter of 2024 and the first quarter of 2025. “This should provide the market with a good basis for the next stage of the upward trend”, judges the Swiss establishment, which estimates that central banks will continue their purchases of gold in the meantime.

The bank also notes that gold ETFs have started to see positive inflows, which should accelerate with the Fed’s rate cuts. “Re-engagement in this market segment would help strengthen gold’s upside potential, as would direct recommendations to add gold to portfolios or increase gold allocations,” UBS said.

Goldman Sachs, for its part, has a target of $2,700 per ounce for the end of 2024, notably because the precious metal remains attractive to Asian individuals and the metal could benefit from increased fears about the deterioration of the American deficit.

The Big Trump Question

The “elephant in the room” remains, namely the question of what effect the US election, to be held next November, could have on the price of gold. Experts are divided on the impact of a potential victory by Donald Trump, who is currently leading in the polls.

“Investors remember the billionaire’s previous presidency, which had been favorable to the yellow metal, since, under his mandate (January 2017-January 2021), the price of gold in dollars had appreciated by 54%, or 11.5% per year,” considers Laurent Schwartz.

“The anticipation of Donald Trump’s reconquest of the White House is growing, which could strengthen the appeal of precious metals (and therefore gold, Editor’s note) in a context of geopolitical uncertainty”, while gold offers “protection against economic instability”, supports Stephen Innes.

But, on the contrary, Ricardo Evangelista, technical analyst at Activtrades, explains that the prospect of a return of Donald Trump to Washington “limits the upside potential of gold”.

Simply because the economic policy desired by the Republican candidate, which is based on a more expansionary budgetary policy, relaxed regulation, as well as increased customs duties for China, is considered inflationary. Which would be likely to keep the key rates of the American Federal Reserve at a high level and therefore strengthen the dollar and American yields. And therefore, ultimately, weaken the appeal of gold.

“As the prospect of a second Trump presidency increases, so does the likelihood of higher tariffs and a larger US budget deficit, which could lead to higher interest rates,” concludes Ricardo Evangelista.