Gold has been on a tear this year, outperforming other major commodities. The metal has surged over 25% year-to-date, hitting record highs. This performance is driven by expectations of U.S. Federal Reserve interest rate cuts, aggressive central bank purchases, and robust demand from Asian markets. Additionally, geopolitical tensions and uncertainty surrounding the upcoming U.S. presidential election have bolstered gold’s appeal as a safe-haven asset.
Federal Reserve Rate Cuts Propel Gold Higher
The Federal Reserve implemented a highly anticipated interest rate cut on September 1, reducing rates by 50 basis points—the first cut since March 2020. This move provided significant support to gold prices. Lower borrowing costs enhance gold’s attractiveness, as it is a non-interest-bearing asset. The Fed had maintained its key policy rate in the 5.25% to 5.5% range—the highest in over two decades—since July.
The key question now is the pace of future Fed policy easing, especially following Donald Trump’s victory in the U.S. presidential election. The inflationary impact of Trump’s policies could result in fewer rate cuts than previously anticipated. ING’s U.S. economist, James Knightley, expects another 25 basis point cut in December. However, the outlook beyond that is uncertain, with a strong possibility of a pause at the January FOMC meeting. Knightley now anticipates 25 basis point cuts per quarter starting in the first quarter of 2025, with rates potentially bottoming at 3.75% in the third quarter of 2025.
Central Banks Maintain Strong Gold Demand
Central banks have continued to increase their gold reserves, though the pace of buying slowed in the third quarter, likely due to high prices. The National Bank of Poland (NBP) was the largest buyer, adding 42 tonnes to its reserves, bringing total holdings to 420 tonnes, which accounts for 16% of its total reserves. NBP Governor Adam Glapinski has reiterated the bank’s goal to increase gold’s share of currency reserves to 20%.
The Reserve Bank of India (RBI) has also been active, adding gold to its reserves every month during the third quarter, totalling 13 tonnes. This brings India’s gold reserves to 854 tonnes, a 6% increase from the end of 2023.
In contrast, the People’s Bank of China (PBoC) did not add to its gold reserves for the fifth consecutive month in September. This pause follows an 18-month buying spree that had driven gold prices to all-time highs, with current high prices likely deterring further purchases for now.
Exchange-Traded Funds (ETFs) See Continued Inflows
Global physically-backed gold ETFs experienced their fifth consecutive month of net inflows in September, attracting $1.4 billion, according to the World Gold Council. This growth was primarily driven by North American funds, while Europe was the only region to see net outflows.
Investor holdings in gold ETFs typically rise with increasing gold prices. However, ETF holdings had been declining for much of 2024, even as spot gold prices reached new highs. ETF flows turned positive in May and have continued to grow since.
Gold’s Rally Poised to Continue
The combination of a favourable macroeconomic environment, safe-haven demand amid escalating geopolitical tensions, and ongoing central bank purchases is expected to drive gold prices to new highs. The U.S. presidential election in November is also likely to add upward momentum through the end of the year, regardless of the election outcome.
