Safe haven buying ramps up, could Gold soar after Powell?

Gold prices hold just below the $2500 psychological level as analysts predict a bounce towards unprecedented highs. Some forecasts suggest the metal could reach $3,000 per ounce by next year. Tuesday's surge to a new all-time high of $2531.64 highlighted this bullish momentum.

Gold's recent rally had been driven by its safe-haven appeal amid global uncertainty, fueled by geopolitical tensions like the Israel-Iran conflict and the Ukraine war. Sabrin Chowdhury, head of commodities analysis at BMI, predicts multiple highs for gold in 2024.

Gold traders are also refocusing on the prospect of lower U.S. interest rates, which is attracting Western safe-haven seekers back to the market. This is evident from the inflows into physically backed products, according to Carsten Menke, an analyst at Julius Baer. Menke notes that the weakness in the Chinese economy and ongoing geopolitical tensions involving China suggest a strong likelihood that gold buying will resume, with Julius Baer setting a 12-month price target of $2,600 per ounce.

The recent surge in gold prices has opened up significant opportunities across financial markets, particularly in exchange-traded funds (ETFs) and leading gold mining stocks like Barrick Gold and Newmont. As economic uncertainty persists and the U.S. dollar weakens, investors are increasingly turning to gold as a safe haven, driving up both the metal’s value and the stock prices of companies that produce it. 

Source: Trading View

This environment has also sparked interest in ETFs that focus on gold and mining stocks. These ETFs offer investors an accessible way to gain exposure to gold without directly holding the metal. Funds like SPDR Gold Shares (GLD), which saw its holdings jump to a seven-month high of 859 tons on Monday, closely track gold prices. 

Source: Trading view

Discount stock buying presents potential headwinds

There are potential headwinds for gold's momentum. Bank of America reported that its clients have been buying the recent dip in stocks, turning net buyers for the first time in five weeks, with inflows totaling $5.8 billion. 

This marks the tenth biggest inflow since 2008, with larger inflows directed towards individual stocks. All market cap sizes—large, mid, and small—experienced inflows, and buybacks among corporate clients remained robust, tracking above typical seasonal levels for the last 22 straight weeks. This renewed interest in equities, particularly in sectors like Technology and Communication Services, which led sector inflows last week, could divert some capital away from gold, especially as equity volatility is expected to continue heading into the U.S. election.

Moreover, the Federal Reserve's anticipated actions after Powell are critical. Gold has rallied more than 20% this year on optimism that the Fed will begin cutting interest rates in September. The Fed is expected to cut rates by 25 basis points at each of the three remaining meetings of 2024, according to market expectations, with a slim majority of economists in a Reuters poll dismissing recession concerns. 

Lower interest rates diminish the opportunity cost of holding non-yielding assets like gold compared to interest-bearing securities such as U.S. Treasurys. Additionally, a rate cut would likely exert downward pressure on the U.S. dollar, further enhancing gold's appeal to investors holding other currencies.

Investor sentiment towards gold remains overwhelmingly positive, with analysts from Citi forecasting a potential rise to $3,000 per ounce by mid-2025. They also predict an average price of $2,550 per ounce in the fourth quarter of this year. 

At the time of writing, Gold is hovering around the $2,500 psychological level. The larger trend still looks bullish with some short-term downward pressure evident. Upward movement could face headwinds as indicated by RSI looking flat just under 70. Buyers will likely face resistance at the $2,520 level, while sellers will likely be held at the $2,460 and $2,430 support levels. 

Source: Deriv MT5

Disclaimer

The information contained within this article is for educational purposes only and is not intended as financial or investment advice. It is considered accurate and correct at the date of publication. Changes in circumstances after the time of publication may impact the accuracy of the information. The performance figures quoted refer to the past, and past performance is not a guarantee of future performance or a reliable guide to future performance. No representation or warranty is given as to the accuracy or completeness of this information. Do your own research before making any trading decisions.