Gold Bulls Delight as Powell Juices Price Rally at Jackson Hole

Gold's recent surge past $2,500 per ounce is likely to continue as the Federal Reserve prepares to cut interest rates, traditional factors like declining yields reassert themselves, and Western investors return to the market.

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Jay Hatfield, CEO of Infrastructure Capital Advisors, recently took a long position on gold options for the first time in years. He noted that many believed the Fed would be the last to reduce rates, but now it's joining the trend. According to Hatfield, Fed Chair Jerome Powell's speech at the Jackson Hole symposium, which hinted at upcoming rate cuts, was a pivotal moment for gold.

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This year, gold has been one of the top-performing commodities, setting multiple records. The first half of the year saw strong demand from central banks and Asian buyers, which countered the negative effects of a strengthening US dollar, rising Treasury yields, and outflows from gold-backed exchange-traded funds (ETFs). Now, these factors appear to be aligning in gold's favor.

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Rajeev De Mello, global macro portfolio manager at GAMA Asset Management SA, pointed out that the opportunity cost of holding gold is decreasing. He emphasized that the rapid decline in real yields, coupled with a generally weaker dollar, makes gold an attractive alternative currency to bet against the dollar.

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So far in 2024, spot gold has surged by over 20%. Banks like Goldman Sachs have been optimistic about gold's potential, predicting as early as April that prices could reach $2,700 per ounce. Following Powell's remarks at Jackson Hole, US 10-year real yields have fallen to their lowest levels since December, which is beneficial for gold since it doesn't offer interest.

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Investor interest in gold is also growing. Hedge funds and speculators have been increasing their bullish positions on Comex, with net-long positions in gold reaching their highest level in over four years, according to data from the Commodity Futures Trading Commission.

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There are also signs of renewed demand for gold-backed ETFs. SPDR Gold Shares, one of the leading ETFs, has seen inflows for eight consecutive weeks, the longest streak of inflows since mid-2020.

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However, even with Western investors showing renewed interest in gold, prices could be affected by weakening demand in Asia, where high prices have dampened consumption. Additionally, China's central bank recently paused its monthly gold purchases, weakening two key factors that supported gold's rise in the first half of the year.

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For now, Citigroup Inc. expects ETF inflows to increase "significantly" over the next six to 12 months, driven by looser monetary policy and potential volatility amid recession risks. The bank predicts that gold could reach $3,000 per ounce by mid-2025, according to a note published before Powell's Jackson Hole speech. At 9:18 a.m. in New York, spot gold traded at $2,525.73 per ounce, close to its all-time high.

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UBS Group AG expects large ETF inflows and continued speculator demand once the Fed makes its first rate cut. The bank forecasts gold prices to reach $2,600 by the last quarter of this year. Additionally, rising geopolitical risks are likely to boost demand for portfolio hedges, according to Wayne Gordon, a commodities strategist at UBS Global Wealth Management.

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Ryan McIntyre, managing partner at Sprott Inc., a Toronto-based asset manager with $31.1 billion in assets under management, highlighted the growing interest in physical gold ETFs. He noted that buying through ETFs will play a significant role in gold's future.

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In summary, gold's rally is far from over as a combination of Fed rate cuts, declining yields, and renewed investor interest in gold-backed ETFs support the metal's continued rise. Despite potential challenges from weaker Asian demand, the overall outlook for gold remains bullish, with prices potentially reaching new heights in the coming years.

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