Gold Prices Approaching Record Highs

Gold is approaching its record highs, having risen 50% from its 2022 lows and 25% since mid-February.

Drivers of the Surge

According to Morgan Stanley commodity strategists, this price surge is primarily driven by the physical market. Central bank purchases have doubled in 2022/23 compared to previous trends. Additionally, retail buying has increased this year, especially in China, where demand for bars and coins is very strong.

ETF Inflows and Rate Cuts

Gold exchange-traded funds (ETFs) have experienced continued inflows since late May, mainly from Europe following the June rate cut. Strategists believe that US ETFs will likely follow suit as rate cuts take effect, further supporting gold prices.

Economic Outlook

While fears of a recession in the US are rising, economists still predict a soft landing, suggesting that a stronger Federal Reserve reaction could support investor inflows into gold. Strategists led by Amy Gower noted that COMEX net longs are at the highest since Q2 2022, but are still 100,000 lots off all-time highs.

Future Predictions

Although the recent rally is driven by physical factors, strategists anticipate that financial flows will drive the next leg higher, predicting gold prices could reach $2,650/oz by Q4 2024. They acknowledge that volatility is expected to continue as new US data influences rate cut predictions, but the overall trend for gold is anticipated to rise.

Market Challenges

China’s central bank halted its gold purchases in May after 18 consecutive months, and India’s jewelry demand has reportedly softened. Furthermore, in June, gold withdrawals from the Shanghai Gold Exchange were down 31% year-over-year, as weak jewelry demand offset strong bar and coin consumption.