Gold breaks through the $2500 mark for the first time! After hitting a new high, will the next target be $2700?

According to Zhitong Finance, boosted by expectations of an imminent rate cut by the Federal Reserve, the price of gold broke through the $2500 per ounce mark on Friday for the first time. Disappointing data on the U.S. real estate market released on Friday strengthened expectations of a rapid further rate cut by the Federal Reserve, causing the spot gold price to climb over 2%, surpassing the record set last month. Low interest rates are usually favorable for gold, and the two typically have a negative correlation.

Data shows that as builders respond to weak demand, U.S. housing starts in July fell to the lowest level since the end of the pandemic. Bob Haberkorn, Senior Market Strategist at RJO Futures, stated that this is "another sign that an economic recession is imminent." The Federal Reserve is expected to cut rates, with the magnitude exceeding previous expectations.

Gold Price Expected to Continue Rising

Optimism in the market about loose monetary policies and major central banks buying gold in large quantities has driven the price of gold up by over 20% so far this year. Additionally, due to escalating geopolitical risks such as tensions in the Middle East and the Russia-Ukraine conflict, gold is also seen as a safe-haven asset.

Earlier this year, the rise in gold prices caught experienced analysts and senior professionals by surprise, as there isn't always a clear macro catalyst to justify the increase in gold prices. Despite traders reducing bets on the timing of rate cuts, gold has maintained these gains. Recently, as the market widely expects the Federal Reserve to begin cutting rates soon, the price of gold has edged higher.

The recent increase in gold prices may not be unexpected. In June this year, consultancy firm Metals Focus predicted that gold prices would hit a new record this year, while earlier this month, Citigroup stated that its fundamental expectation for the price of gold in 2025 is $2700-3000 per ounce. Furthermore, a report by Bank of America previously stated that with the Federal Reserve starting to cut rates and rising debt bringing economic uncertainty, gold prices could touch $3000 per ounce in the next 12 to 18 months.

Meanwhile, in July, UBS mentioned that there is greater upside potential for gold, as it expects the price of gold to reach $2600 per ounce by the end of this year and $2700 per ounce by mid-2025. Allocating gold in an investment portfolio is an attractive diversification and hedging tool for investors.

Market Expectations of Fed Rate Cuts Boost Gold Prices

Recent economic activity data released by the United States has led the market to believe that the Federal Reserve is about to lower borrowing costs from a more than 20-year high, with traditional drivers of metals regaining dominance. Given the conflicting signals recent economic data has given about the U.S. economy, there is debate about the extent of the rate cut the Fed may make in September. Nevertheless, the market has broadly priced in a nearly 100 basis point rate cut by the Federal Reserve this year

Data from the U.S. Commodity Futures Trading Commission shows that in the week ending August 13, speculators' net bullish bets on New York Mercantile Exchange gold futures reached a nearly four-year high. At the same time, data shows that after experiencing years of capital outflows, the amount of gold held by exchange-traded funds (ETFs) has increased in recent months.

Bart Melek, Global Head of Commodity Strategy at TD Securities, said that gold investors "typically tend to believe that the Federal Reserve will take more aggressive actions in terms of loose monetary policy." He stated that the price of gold may further rise to $2,700 in the coming quarters, as "macro/monetary policy and central bank pressures are increasing."

Global Central Banks Spark "Gold Rush"

Gold may still have room to rise in the future, benefiting from strong buying by Western investors and global central banks. Adrian Ash, Director of Research at BullionVault, said, "Over the past five years, global central banks have seen a surge in demand for gold, with almost one ounce out of every ten ounces of gold produced by the mining sector being bought by central banks. The endless demand for gold by central banks has become one of the cornerstones of the gold bull market, playing a crucial role in both fundamentals and market sentiment."

According to Ash's data, since the summer of 2004, the total weight of gold in central bank reserves has increased by nearly 19%, while its value in US dollars has grown sevenfold to $2.4 trillion, mainly driven by Russia, China, India, and Turkey.

Furthermore, African countries are currently eager to establish gold reserves to hedge against the impact of geopolitical tensions on their currencies. Countries like South Sudan, Zimbabwe, and Nigeria are either planning or have already taken measures. A survey by the World Gold Council shows that around 20 central banks are expected to increase their gold reserves in the next year.

Paul Wong, Market Strategist at Sprott Asset Management, pointed out that the continued gold purchases have "nearly exhausted or already depleted the 'freely available inventory' in the market."

According to data from the World Gold Council, as of May 2024, the total global official gold reserves amounted to 36,089 metric tons, while market estimates indicate that the total amount of gold historically mined is around 212,582 metric tons.

Torsten Slok, Chief Economist at Apollo Global Management, stated that the reason for the rise in gold prices is central banks buying gold, possibly due to concerns about the U.S. fiscal situation and reducing reliance on U.S. Treasury bonds Gold Newsletter editor Brien Lundin pointed out that after the United States and its allies imposed sanctions on Russia, central banks' demand for gold surged. Lundin stated, "After the weaponization of the US dollar, central banks are trying to protect themselves by shifting their reserve assets from the dollar to gold."

He mentioned that with the entry of Western buyers, there is no reason for central banks or Chinese investors and depositors to abandon their gold purchases. Therefore, we may see a situation where "gold appears for the first time in history as an investable asset being purchased by both Eastern and Western buyers simultaneously." Lundin suggested that if the market does indeed witness a scenario of Eastern and Western joint gold purchases, it could lead to "higher gold prices than what we see today."