Nuggets: Gold at $2400!
Nuggets
August 12, 2024
7 minutes
Gold at $2400!
The gold rally that started in March has gone from strength to strength, resulting in a meteoric climb of 19% in USD, and 21% in ZAR over the past two months.
As per my remark in the previous Nugget, gold was seen trading relatively sideways in a range of between $2,000 and $2,090/oz before the breakout. So, market participants and spectators have been trying to find the clear reasons for this jump – and more importantly, does this bull run still have legs?
If anything, gold’s upward move was predicated on the expectation the U.S Fed would cut interest rates multiple times this year, a weakened Dollar, and lower real yields in USD - standard tailwinds for a good price run in the yellow metal.
As per my remark in the previous Nugget, gold was seen trading relatively sideways in a range of between $2,000 and $2,090/oz before the breakout. So, market participants and spectators have been trying to find the clear reasons for this jump – and more importantly, does this bull run still have legs?
If anything, gold’s upward move was predicated on the expectation the U.S Fed would cut interest rates multiple times this year, a weakened Dollar, and lower real yields in USD - standard tailwinds for a good price run in the yellow metal.
The Pundits
However, respected pundits like former Treasury Secretary Larry Summers, have stated that we’re more likely to see rate increases by the Fed. Since then, major investment banks like Goldman, UBS, Bofa and Barclays have all pushed back their forecasts for rate cuts this year. Yet the gold price still continued to go up, peaking this week at over $2,400/oz – a new high – before giving up some gains and retreating back below the critical number.
The analysts and economists are suggesting then that inflation isn’t transitory, as the Fed said it would be in 2021, and that it’s likely here to stay. So effectively, they believe the Fed can’t raise rates and will therefore not engineer a supposed soft economic landing i.e. staving off a recession (due to the rapid hikes in interest rates since then).
The analysts and economists are suggesting then that inflation isn’t transitory, as the Fed said it would be in 2021, and that it’s likely here to stay. So effectively, they believe the Fed can’t raise rates and will therefore not engineer a supposed soft economic landing i.e. staving off a recession (due to the rapid hikes in interest rates since then).
Inflation expected to continue
They’re not the only ones expecting the inflation tide to continue:
- Central banks outside the U.S. have been on a sustained gold-buying spree. Total demand jumped to 1,037.4t in 2023. These are the guys bolstering their reserves with gold for a good reason – they don’t have confidence in the long-term value of the Dollar.
- Hedge funds have accumulated nearly 300 tonnes of gold in March through the futures (paper) market. These are the smartest investment minds buying gold, and when they move, the numbers are big.
- The younger generation in leading gold-buying countries is starting to favour gold over more traditional asset classes. For example, Gen Z buyers in China are saving in physical 1-gram gold beans, as jewellery stores struggle to keep up with this new consumer trend.
The numbers in SA
In SA, the recent inflation numbers from March came in at a two-month low of 5.3% y-o-y, but that’s to be short-lived, as expectations are for incoming oil prices to continue driving Rand weakness. Against the Dollar, the Rand is trading ever closer to the 20 mark – R19.39 as of Friday, 19 April.
There are, however, concerns that gold’s current price levels are inflated due to speculative trading. Traders might be overextending in anticipation of future central bank purchases, a strategy that could backfire if market conditions shift suddenly. There might very well be some overconfidence in the market, and traders should probably be taking profits at these levels – but that’s usually a short-term, healthy impact.
Outside of short-term speculative activity, it still seems everyday goods' prices will continue to rise (effects of inflating the money supply), and the subsequent devaluation in currency units should continue. Other than that, secular moves in the price will be determined by future inflation outcomes, geopolitical temperatures and ultimately the Fed’s rate decisions... stay tuned!
In the meantime, gold in Rands is steadily approaching that R50 000/oz mark.
There are, however, concerns that gold’s current price levels are inflated due to speculative trading. Traders might be overextending in anticipation of future central bank purchases, a strategy that could backfire if market conditions shift suddenly. There might very well be some overconfidence in the market, and traders should probably be taking profits at these levels – but that’s usually a short-term, healthy impact.
Outside of short-term speculative activity, it still seems everyday goods' prices will continue to rise (effects of inflating the money supply), and the subsequent devaluation in currency units should continue. Other than that, secular moves in the price will be determined by future inflation outcomes, geopolitical temperatures and ultimately the Fed’s rate decisions... stay tuned!
In the meantime, gold in Rands is steadily approaching that R50 000/oz mark.
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