On Monday, August 12, the gold market ushered in a strong rebound, with gold prices rising sharply by nearly 1.8%, and the price of gold per ounce rose by $43.56 to close at $2,471 per ounce. This is the best performance of gold in the past 10 days, close to the historical high of $2,482 set in mid-July. Although the price of gold experienced a small correction of 0.5% in the previous week, the latest rise shows that the price of gold has resumed its upward momentum.

Looking back at the first half of 2024, gold performed well and became one of the best performing assets. According to the latest data from the World Gold Council, the international gold price rose by about 10% during this period. And the rise of gold is not limited to the US dollar. It has also achieved double-digit growth in other currencies, with an increase of 15%. In contrast, the performance of the US stock market is relatively volatile. The price of gold has been rising steadily since the beginning of this year, and it has not fallen below its upward trend even during market fluctuations, showing the stability and attractiveness of gold as a safe-haven asset.

Since 2022, central banks have been buying gold in large quantities to diversify their assets and reduce their dependence on the US dollar. Wang Xinjie, chief investment strategist of Standard Chartered China Wealth Management, said that against the backdrop of global geopolitical risks, the global central bank's demand for gold reserves has steadily increased. According to data from the World Gold Council, compared with last year, central banks are more optimistic about the prospects of gold as a reserve asset in the next twelve months. 81% of the central banks surveyed said that the global central bank's gold holdings will increase in the next twelve months, compared with 71% last year.

Why did the gold price surge this time?

The recent market environment is obviously favorable for gold. The interest rate hike by the Bank of Japan has caused turmoil in the global financial market. Coupled with the tensions in the Middle East, the market's risk aversion is still in the stage of heating up. In addition, the continued fermentation of the Fed's interest rate cut expectations, the weakening of the US dollar, and the continued prevalence of recession trading are all conducive to boosting gold prices, so the international gold price continues to remain high.

The growing fiscal deficit in the United States is also good for gold. Data from the U.S. Treasury Department showed that as of July 26, the size of the U.S. national debt had exceeded $35 trillion, the first time ever to exceed this level. In contrast, in January this year, the size of the US national debt just exceeded the 34 trillion US dollar mark; in September last year, the size of the US national debt exceeded 33 trillion US dollars; and 40 years ago, the size of the US national debt was only around 900 billion US dollars.

The most direct reason for the rise in gold prices this round is the decline in US Treasury yields and the intensification of the Middle East conflict. According to CCTV News, Israel continued to launch attacks in southern Gaza on Monday. Hamas asked the mediators of the ceasefire negotiations in the Gaza Strip to formulate an implementation plan for the results of previous negotiations and force Israel to implement it, rather than holding more negotiations or proposing new plans. Previously, Israel intercepted a reverse gear launched from Lebanon, indicating that the conflict may expand to another region. The Middle East conflict has increased the attractiveness of gold as a hedge against geopolitical uncertainty.

Factors affecting gold price fluctuations

Investors can judge the trend of gold prices from the following aspects:

• Gold prices are negatively correlated with the US dollar index: gold and the US dollar have both monetary attributes and have a mutual substitution effect. When the value of the US dollar declines, the status of gold as a currency rises, and the price usually rises, and the two tend to be causal.
• Gold price is negatively correlated with real interest rate: Gold has the characteristic of "zero coupon". The only benefit for investors holding gold comes from the rise in gold price. Since gold cannot generate interest, when the real interest rate rises, holding other interest-bearing assets such as stocks and bonds will generate higher returns, and the gold price will fall; when the real interest rate falls, the returns of holding other financial assets will fall, the relative value of gold will increase, and the gold price will rise, so the real interest rate is the opportunity cost of holding gold.
• Gold price is positively correlated with inflation level: Gold investment has value preservation value. When severe inflation occurs, gold can reduce the losses caused by currency depreciation and reduce market risks. During the period of rising inflation level, the gold price will theoretically rise accordingly.

Should I invest in gold now?

All signs indicate that the current market environment is very favorable for gold. However, investors also need to take into account the tailwinds and headwinds facing the gold price. Louise Street, senior market analyst at the World Gold Council, said that since the beginning of this year, strong demand from global central banks and over-the-counter markets has driven gold prices to continue to rise and set new highs. On the other hand, as gold prices continue to rise, demand for gold jewelry has fallen sharply, and it has also prompted some individual investors to take profits.

However, investors still need to be wary of the risk of "buying expectations and selling facts". Some analysts believe that the upward trend of gold, which is dominated by the Fed's interest rate cut expectations, is coming to an end. But after the rate cut, will the US economy still be resilient? Is the Fed's rate cut lower than market expectations? What will be the result of the US election? These factors will determine whether the price of gold will fluctuate, go down, or break through in the medium term. If the rate cut is lower than expected, the price of gold may fluctuate downward.

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Source：uSMART SG

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