Gold Soars to Record Highs: Key Drivers and Future Prospects

Gold prices have surged about 22% since the start of the year, making it one of the top-performing assets of 2024. As of yesterday, gold surpassed the $2,530 per ounce mark, setting a new all-time high. The value of bullion has reached one million dollars for the first time in history. 

According to the latest data from the World Gold Council’s (WGC) Gold Return Attribution Model, the main driver of the increase in gold prices has been the decline in yields on benchmark 10-year U.S. Treasury bonds. Yields are declining as expectations grow that the Federal Reserve will start lowering interest rates at its September meeting. The downtrend in yields reduces the opportunity cost of holding non-yielding gold, creating a favourable environment for its rise.  

However, while expectations of rate cuts continue to be a key driver of market volatility, they are largely priced in. Therefore, the recent rally in gold may have been driven more by geopolitical tensions and speculation surrounding China's new move on gold quotas rather than interest rate expectations. 

Increase in Gold Futures Open Interest Points to Bullish Sentiment 

According to WGC’s open interest data, the flow of money in the futures markets rose towards a four-year high in mid-July, following a decline in the first week of the month. 

Open interest represents the number of outstanding contracts held by market participants. Therefore, the increase recorded over the past week was interpreted not merely as a reflection of the covering of short positions but as a growing optimism about the future price of gold. 

Western ETFs Reverse Outflows, Driving Gold Inflows 

Net inflows into global physically-backed gold ETFs (Exchange Traded Funds) have been accelerating for the past three consecutive months, contributing to the rise in gold prices. The largest contribution to these inflows came from the reversal of long-standing outflows in Western ETFs. Last week's data shows net inflows continued in all regions except Asia. 

Chinese Gold Market Faces Challenges with Slowing Demand 

The economic slowdown in China, the world's largest gold buyer, and record gold prices are limiting the demand for gold among Chinese consumers. 

According to China's latest foreign trade data, the country's gold imports in July fell by 24%, reaching 44.6 tons, the lowest level since 2022. This decline follows a 58% drop in June compared to the previous month. 

Due to rising gold prices, Chinese consumers are now purchasing less gold jewelry, and demand for bullion and coins is also limited. In the past quarter, growing concerns about the Chinese economy increased the demand for gold bullion among Chinese investors as a haven. However, Shanghai gold premiums have gradually weakened, decreasing in July and August, underscoring the current weak demand. 

However, according to a Reuters report, the People's Bank of China has granted new gold import quotas to several Chinese banks, anticipating a revival in demand despite record-high prices. Gold bullion demand in China was a significant factor in the price surge seen in March and April. New quotas have sparked speculation that China's gold demand may increase, potentially driving prices higher. However, no data has yet confirmed an actual rise in Chinese demand. 

Looking Ahead: Traders Eye Powell's Speech for Rate Cut Signals 

Later in the week, signals from the Jackson Hole Symposium regarding potential rate cuts will shape the outlook for gold. Traders will closely monitor how recent U.S. data influences the tone of Chairman Powell's speech. They will look for clues in his remarks about the timing and extent of any rate cuts. 

This year, the expected rate cuts from the Fed range between 75 and 100 basis points. If Powell does not deliver the dovish tone anticipated, gold bulls may be forced to retreat. Powell might prefer to avoid giving clear signals before evaluating incoming data before the September 18 meeting. 

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