Gold prices soar amid economic shifts and rate cut expectations

On Wednesday morning, one ounce of gold cost as much as $2,482. This is over $30 more than the previous record set on May 20. Historically, gold has been overvalued, considering its correlation with other asset prices. Despite this, finding an analyst today who believes that gold has poor prospects is challenging.

Since the beginning of the year, gold has risen by 20%, especially from February to April. Since then, its price has been relatively stable, although it temporarily hit a new record in May. The recent three-week surge has pushed gold out of this sideways trend, making it over 5% more expensive than three months ago.

“The recent surge in gold prices above $2,400 per ounce is due to lower-than-expected CPI inflation readings in the USA,” says Tomasz Niewiński, a commodity market analyst at PKO BP, to money.pl. He refers to data from last Thursday showing that inflation in the USA slowed to 3% in June from 3.3% in May, contrary to the generally expected 3.1%. The 0.1% month-to-month drop in the CPI index was even more surprising.

On Monday, Federal Reserve Chairman Jerome Powell noted that the last three inflation readings increased the Fed's confidence in returning to its inflation target.

“After this data and Powell’s speech, expectations for a Fed rate cut increased. The probability of the Fed deciding on this at its September meeting is now assessed by the market at 98%, up from just over 70% a week ago,” explains Niewiński. “Additionally, the yield on U.S. Treasury bonds has significantly decreased to levels last seen in March,” he adds.

Actual interest rates have also fallen; for example, the 10-year Treasury Inflation-Protected Securities (TIPS) yield dropped below 2% in July. “A rate cut could push real interest rates even further down, presenting an opportunity cost for non-interest-bearing assets like gold,” Niewiński argues. This is one reason most analysts view the prospects for gold favorably.

What growth potential does the price of gold have? One of the most optimistic forecasts was recently made by analysts at Citi, who predict that in the second half of 2025, gold could be priced between $2,800 and $3,000 per ounce, up to 20% higher than today. They believe this would align with the behavior of gold and other precious metals during previous cycles of monetary easing. Usually, six months after the first rate cut, precious metals were 13% more expensive.

Analysts at Societe Generale have maintained that gold could cost $2,750 to $2,770 per ounce by the end of 2024. Experts at Goldman Sachs share similar expectations.

Analysts at J.P. Morgan are a bit more cautious. “The direction of travel is still higher over the coming quarters, forecasting an average price of $2,500/oz in the fourth quarter of 2024 and $2,600/oz in 2025, with risk still skewed toward an earlier overshoot,” wrote Gregory Shearer, chief strategist of the base and precious metals markets at J.P. Morgan.

Historically, fluctuations in real interest rates significantly influenced gold prices. The higher they are, the less profitable it is for investors to hold gold, which bears no interest. In recent years, however, this correlation has weakened. The monetary tightening cycle that began in 2022 raised real interest rates, briefly discouraging investors from gold. By the fourth quarter of that year, the price of gold surged, and in 2023, its price increased by over 13%.

This unusual behavior of gold has caused its price to deviate from expected levels based on today’s real interest rates. As a result, some analysts believe a few overvalue gold to several percent. This suggests price stabilization in the short term, even if accurate interest rates continue to fall. For instance, Nitesh Shah, a commodities strategist at WisdomTree, expects a sideways trend to continue until the end of the third quarter, with gold prices rising after that.

On the other hand, compared to stock prices, gold appears heavily undervalued. Stocks typically rise when investors have a high appetite for risk and optimism. In such circumstances, gold, known as a haven during market turmoil, usually performs poorly. However, this trend has been inconsistent in recent years. The S&P 500 experienced two years of significant gains, yet the precious metals market also boomed. Recently, both stock and gold prices have been rising in tandem.

Given these disturbances in historical relationships between gold prices and other assets, the consensus among analysts that gold should continue to rise is surprising. Understanding why these relationships have weakened is therefore necessary.

Gold prices diverged from accurate interest rates after Western countries imposed sanctions on Russia for its attack on Ukraine. These sanctions, including freezing Russia's foreign reserves held in U.S. bonds, influenced decisions by other central banks about reserve allocations.

The result was a massive increase in demand for gold from central banks. In 2023, institutions monitored by the World Gold Council (WGC) purchased 1,037 metric tons of gold, more than ever before, excluding 2022.

Central banks of countries with poor U.S. relations primarily buy gold, but others, including Poland’s National Bank, also increase their reserves. This is a reaction to an uncertain and tense geopolitical climate. Many other investors have a similar viewpoint.

Analysts expecting further rises in gold prices often cite that this uncertainty will persist until the November U.S. presidential elections, possibly even longer. Donald Trump, currently the favorite in the White House race, promises widespread tariff increases on imports to the USA, which could lead to strained relations between Washington and its allies. Additionally, it is unclear how involved the Trump administration would be in defending Ukraine.

“Many of the structural bullish drivers of a real asset like gold — including U.S. fiscal deficit concerns, central bank reserve diversification into gold, inflationary hedging, and a fraying geopolitical landscape —have lifted prices to new all-time highs this year despite a stronger U.S. dollar and higher U.S. yields, will likely remain in place regardless of the U.S. election outcome this autumn,” assessed Natasha Kaneva, chief commodities market strategist at J.P. Morgan, in a recent report.