• Gold prices are up 28% YTD, driven by dovish Fed, central banks buying and geo-political tensions.
• Gold could pull back in the short term, but downside appears limited.
• Gold Momentum Remains Strong and is on track to reach $3,000 in 2025.

Gold’s Impressive Rally in 2024

Gold, traditionally regarded as a safe-haven asset, has experienced a meteoric rise this year. Trading at around $2,000 at the onset of the year, gold futures have reached a fresh record high of $2,708 last Thursday. This remarkable rally has been fuelled by expectations of significant interest rate cuts in 2024 and 2025, strong central banks buying, and global geopolitical tensions.

Further Rate Cuts Would Support the Precious Metal

Expectations that the Federal Reserve will start an easing cycle in 2024 has sent gold prices soaring. The Federal Reserve cut rates by 50 basis points at its September meeting with Fed chair Jerome Powell signalling on Monday at the National Association for Business Economics conference that he sees two more rate cuts by the end of the year, totalling 50 basis points.

A further 100 basis points cuts are projected in 2025, with the Fed expecting rates to fall to 3% in 2026. As interest rates fall the gold market gets a boost and is likely to continue to get support from the lower interest rate environment.

Additionally, lower interest rates are likely to trigger further depreciation of the U.S. dollar. Gold has an inverse relationship with the greenback; therefore, a falling U.S. dollar is likely to act as a tailwind for gold.

China’s Role in the Surge of Gold Demand

Gold has been one of the top-performing commodities since late 2022, with its price rally continuing for nearly two years. China’s aggressive gold-buying spree, which began in November 2022, has been a significant driver of this trend. Although China’s buying frenzy has paused in recent months, it’s likely not over yet.

In 2023, China’s gold purchases reached a remarkable peak with the People’s Bank of China (PBoC) increased its gold reserves by 30%. According to the World Gold Council (WGC), central banks – led by China – purchased a total of 1,037 tonnes of gold last year, with the PBoC accounting for more than all other central banks combined. This buying momentum continued into 2024, with net purchases of 290 tonnes recorded in the first quarter.

Geopolitical Risk Keeps Gold Prices Elevated

Gold’s status as a safe haven and a hedge against political risks remains unquestioned.

The latest developments in the Middle East increase the prospects of further escalation of the conflict and turning it into an all-out regional war. This heightened geopolitical uncertainty continues to support gold prices. With looming U.S. election and rising geo-political risks in Ukraine and the Middle East, gold’s demand is likely to remain strong.

Downside Risk Remains Limited

After hitting a new record high of $2,708 gold prices are seeing some selling pressure for three consecutive days. Optimism surrounding China’s stimulus measures is drawing investors towards riskier assets, leading to a shift in flows away from gold.

While China’s economic stimulus measures have increased appetite for riskier assets, the risk of escalating geopolitical tensions in the Middle East and the dovish Federal Reserve’s stance are helping to prevent a significant pullback in gold prices.

Source: TradingView

Technical Outlook: Gold is Overbought but Remains Resilient

Despite reaching overbought territory on a monthly, weekly, and daily basis following a stellar run, gold remains on the defensive, hovering just below last week’s all-time high.

While the overbought momentum conditions point to a likely pull back, market sentiment remains bullish. Therefore, any potential weakness in the short-term may be shallow, with first support arising around $2,570.

Such a pull back will not change the overall bullish outlook for gold and would present a good buying opportunity. Volatility could pick up around the Nonfarm payroll report on Friday; however, all eyes will be on the Fed’s next policy decision, which could trigger further gains for gold. Our long-term view on gold remains bullish and our target is in the range between $2,900 and $3,000.

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