Ready, Set, Gold! Bull Run May Have Just Begun

Gold’s rally is starting to heat up. With more rate cuts on the horizon and signs of Western investors returning, we see gold prices potentially reaching even higher in the near term.

Gold is one of the best-performing asset classes year-to-date, outperforming U.S. and international equities and bonds, commodities and other real assets (broadly speaking). Continued global central bank buying and heightened geopolitical tensions were among the key drivers of gold’s strong returns earlier in the year. More recently, the U.S. Federal Reserve’s (Fed’s) pivot on interest rates and nascent signs of returning investment demand have been more prevalent drivers and could, in our view, lead to even higher prices in the near-term.

Gold Has Delivered Impressive Year-to-Date Performance

Purchases from global central banks, particularly those in China and other emerging markets, has been a developing trend since the Global Financial Crisis (GFC). For the last several years, including the first half of 2024, this has contributed to strong gold demand. This trend, in our view, may suggest a broader desire by these countries to “de-dollarize,” or reduce their dependence on the U.S. dollar. Not only have global central banks increased their gold reserves, many have communicated that they plan to continue purchasing more gold in the future.

Gold Reserves of China and Other Emerging Markets Are Growing

More recently, the primary catalyst for higher gold prices has been the Fed’s interest rate policy. The U.S. has focused on addressing high-interest rates in an attempt to achieve a “soft landing” for the economy following a period of record-high inflation. The Fed’s recent 50 basis point reduction in its key interest rate was generally welcomed by gold markets. Historically, gold has performed well during such rate-cutting cycles, with an average cumulative return of around 25% over 500 trading days following the Fed’s first cut. Rate cuts tend to weaken the U.S. dollar, further boosting gold’s appeal to global investors, and as uncertainty about the broader economy grows, gold benefits from its status as a safe-haven asset.

Gold Historically Performs Well Following First Fed Rate Cuts

Absent from gold’s recent rally has been Western investment demand, tracked via gold-backed exchange-traded funds (ETFs), but flows into gold-backed ETFs have started to pick up. Historically, gold ETF flows have been a catalyst for higher gold prices. The question remains whether the disconnect between flows and prices will close and, if so, what implications it will have for an even higher gold price.

Until Recently, Gold Prices and ETF Gold Holdings Were Closely Connected

Looking forward, we believe gold is well positioned to continue its rally, especially if Western investors return to the market. The anticipation of further rate cuts by the Fed, along with continued inflationary pressures and geopolitical risks, are likely to further bolster gold’s appeal as an attractive alternative to a weaker dollar and a hedge against market volatility. With this backdrop, we believe that gold prices could reach their inflation-adjusted highs of $2,800 per ounce in the near term.

Important Disclosures

Index definitions: Bloomberg Commodity Index is a broadly diversified index that tracks the commodity markets through commodity futures contracts and is made up of exchange-traded futures on physical commodities, which are weighted to account for economic significance and market liquidity. Bloomberg Global Aggregate ex USD Index measures the performance of global investment grade fixed-rate debt markets that excludes U.S. dollar-denominated securities. Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. Bloomberg U.S. TIPS (1-3 Year) Index measures the performance of the U.S. treasury inflation-linked bond market of obligations with maturities of 1-3 years. FTSE NAREIT All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. Equity REITs. Constituents of the Index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property. MSCI Emerging Markets Index tracks large and mid-cap representation across emerging markets countries. MSCI AC World ex USA Index covers a large portion of the global equity opportunity set outside of the United States. It includes large and mid-cap stocks from 22 developed market countries and 24 emerging market countries. S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector.

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Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.

Gold investments are subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary and political developments. Investments in gold may decline in value due to developments specific to the gold industry. Foreign gold security investments involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability. Gold investments are subject to risks associated with investments in U.S. and non-U.S. issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, gold-mining industry, derivatives, emerging market securities, foreign currency transactions, foreign securities, other investment companies, management, market, non-diversification, operational, regulatory, small- and medium-capitalization companies and subsidiary risks.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

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