The Yellow Metal Is White Hot — Evening Brief – 09.25.24
The price of spot gold has increased by nearly 28% year-to-date and by 12% in the past two months. At this juncture, the rally appears to be unstoppable, and it is becoming increasingly common for the all-time high to be reset, with another record high of $2,670 on Wednesday.
A confluence of circumstances is propelling gold prices upward, with one notable exception: inflation. Last week, the Federal Reserve began to ease monetary policy, with additional rate cuts anticipated. According to numerous FOMC members, the battle against inflation, although not yet concluded, is nearing that milestone.
The notion that gold serves as an inflation hedge over time is not inaccurate; however, in the immediate future, despite the continued evidence of disinflation in the current climate, a variety of other factors have dominated price action.
Rising risk in the Middle East is on the list of likely factors. The new escalation of Israel’s confrontation with Lebanon’s Hezbollah raises the prospect of an all-out war along the Lebanese-Israeli border. Meanwhile, the Ukraine-Russia confrontation continues, and China is testing red lines in the South China Sea with provocations against Filipino ships. When you factor in the possibility of U.S. political turbulence, there are myriad factors that might persuade investors that gold’s reputation as a “safe asset” is becoming more appealing.
There’s also the monetary aspect. As the Federal Reserve reduces interest rates, the yield advantage of US Treasuries over gold narrows. There is also the argument that interest rate cuts are premature and may trigger a fresh round of price pressure.
“By cutting rates more than expected, the Fed is indirectly opening the door to an increased money supply, risking a second wave of inflation and a further weakening of the dollar,” said Alex Ebkarian, COO and co-founder of precious metals dealer Allegiance Gold.
Hedge funds are also actively increasing their holdings of the precious metal as the Federal Reserve commences its monetary easing campaign. The Commodity Futures Trading Commission (CFTC) trade data indicates that speculative positioning is increasing.
Money managers increased their aggregate long positions in Comex gold futures by 28,199 contracts, bringing the total to 241,844 contracts, as evidenced by the CFTC’s Commitments of Traders report for the week ending September 17. Simultaneously, short positions increased by 2,299 contracts to 25,489. Gold’s rally has been sustained by this increase in bullish positions, which has now reached a new four-year high of 216,355 contracts on a long net basis.
Recent reports on central bank acquisitions provide an additional factor. To diversify foreign currency reserves, China, Russia, and other nations have increased their gold holdings, viewed as a non-sovereign currency alternative to the US dollar.
The increase in gold’s value this year is particularly notable as it surpasses the performance of overall commodities and numerous key subcategories, including energy, agricultural products, and base metals.
The argument for allocating a portion of one’s portfolio to gold appears to be compelling. Meanwhile, recent price trend behavior suggests the peak for this cycle has not been seen yet.