(News Bulletin 247) – The ounce reached a new historic high this Friday, approaching 2,600 dollars, while the major central banks confirmed the turn of rate cuts, which supported the precious metal.

Gold is about to break through a new major threshold. The precious metal reached a new record this Friday night, at 2,598.45 points per ounce, just shy of breaking the 2,600 dollars mark.

The precious metal is benefiting in particular from market expectations of rate cuts by major central banks.

On Thursday, the European Central Bank (ECB) cut its main interest rate, the deposit rate, by a quarter of a percentage point. Investors are expecting one or two more cuts from the ECB.

The US Federal Reserve (Fed) is set to begin cutting its key rates next week. Investors have been weighing up two options for several days: a cut of 25 basis points (0.25 percentage points) or 50 basis points, the option that until now seemed the least credible.

“But then a few articles appeared in the Wall Street Journal and the Financial Times suggesting that a 50 basis point move was still in play, leading markets to reassess their expectations once again, and futures are now pricing in a 47.5% chance of a 50 basis point move this morning,” Deutsche Bank said.

Demand still strong

By the end of the year, investors are anticipating a total of 1.25 percentage points of cumulative rate cuts by the Fed.

Let us recall that the reductions in the key rate must mechanically support the demand for gold and its prices. In theory, the evolution of gold is negatively correlated with that of interest rates. The higher the interest rates, the less attractive gold is, all other things being equal. Unlike stocks (with dividends) and bonds (with coupons), gold does not produce income. Its price is consequently battered by a rise in interest rates, because it then becomes less and less interesting to invest one’s money in gold rather than to place it.

“A less restrictive monetary policy benefits gold by reducing the opportunity cost of holding non-interest-bearing assets,” recalls John Plassard, investment advisor at Mirabaud.

Another positive side effect of rate cuts is that they cause the dollar to fall. This again increases the appeal of gold, as with most commodities. Since gold is denominated in dollars, a fall in the greenback makes gold more attractive to investors holding currencies other than the dollar.

Furthermore, demand has been supported by purchases by central banks in emerging countries, but also by individuals. Chinese households in particular have bought physical gold (coins, ingots) while Chinese real estate and stock markets are in full collapse.

Towards a continuation of the increase

For the future, the price of an ounce of gold seems inexorably destined to continue its rise, as the raw material has already gained 25.24% over the whole of 2024 and 33.36% over one year.

“The new record high reinforces the overall uptrend in the yellow metal. Gold’s breakout from its range leaves $2,670 an ounce as a ‘projected price target,’” Jun Rong Yeap, market strategist at IG Asia Pte, told Bloomberg.

Since April, Goldman Sachs has seen the precious metal reach $2,700 per ounce by the end of 2024, particularly because the precious metal remains attractive to Asian individuals and the metal could benefit from increased fears about the deterioration of the American deficit, in connection with the American presidential election next November.

Citi Bank, for its part, estimated in April that the ounce could even reach 3,000 dollars in the next 6 to 18 months. This is due to a strong physical demand and its attractiveness as a hedge against geopolitical risks, explained the bank’s commodities analysts quoted by CNBC.