Some interesting global events have had or will have a sustained effect on the gold price:
The Federal Reserve wants to get inflation down to their desired 2% mark before cutting their Fed funds rate, which is temporarily good for asset prices and stimulative for the economy at large.
They’ve been planning to neutral gradually by indicating potential rate cuts of 25 basis points toward the end of the year. They’ve been under pressure more recently from market pundits to cut rates faster and at 50 basis point jumps, after a slew of soft economic data was released.
The data showed unemployment increases, as well as weak manufacturing output and consumer spending data. This raised concerns about a potential slowdown in the U.S economy, and hence participants calling for the Fed to step in and start lowering rates. As always, the financial establishment want the central bank to step in, in order to stave off a possible recession and protect the downside of their financial assets.
However, the country’s inflation remains somewhat elevated above the Fed’s longer-run goal of 2%, even though it’s been coming down over the past 2 years.
The above, along with disappointing corporate earnings announcements from a few major U.S corporations, resulted in a significant sell-off in the U.S stock markets on 5 August, 2024, where the S&P 500 dropped 3% and the Dow Jones by 2.6%, marking the worst day for these indices since September 2022.
There’s expected pending retaliation by Iran on Israel, following two recent Israeli assassinations, the latter being the political leader of Hamas, Ismail Haniyeh. That assassination actually occurred in Iran itself, as Haniyeh was in Tehran to attend the swearing-in ceremony for Iran’s new president.
Iran has pledged harsh revenge, which could result in all-out war in the region - having a deep effect on international policy and markets.
The carry trade, which involved borrowing in low-yielding yen to invest in higher-yielding assets, was a key driver of liquidity in global financial markets. At the start of August, the Bank of Japan made a rare move by raising its benchmark interest rate from 0.1% to 0.25%. This decision marked a significant shift from the BOJ's longstanding ultra-low interest rate policy, which had been in place to combat deflation and support economic growth.
The rate hike was an attempt to stabilize the yen, but it destabilised global financial markets, resulting in a significant sell-off across the world as traders needed to sell assets they placed on margin to leverage their carry trade bets. This showcased the fragility of international markets at present.
Investors sought safe-haven assets, leading to a surge in demand for gold. The immediate aftermath saw gold prices rally sharply as market participants shifted from riskier assets to the relative safety of gold.
During these few weeks, the gold price has proven itself as the safe-haven insurance policy, remaining and rebounding to the $2,480/oz mark, as other financial asset classes tumbled. Going forward, gold prices are expected to remain influenced by central bank policy changes, especially in the U.S. and Japan, as well as what happens on the geopolitical front.
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