Western investors have surged back into gold, positioning themselves for anticipated U.S. interest rate cuts this year, driving prices to record highs this week.
On Tuesday, gold prices reached $2,531 per troy ounce, marking a more than 20% gain for the year. This rally has been fuelled by institutional investors and bullish hedge fund bets. According to the World Gold Council, physically backed gold ETFs have seen an increase of 90.4 tonnes, equivalent to $7.3 billion, since May, with net inflows positive for seven of the last eight weeks.
This wave of buying marks a shift after Western investors largely remained on the sidelines during gold’s 20-month rally, which was primarily driven by Chinese investors seeking a safe haven amid turmoil in their local equity and housing markets.
“The West is waking up to what Asia has been tracking earlier this year,” said Ruth Crowell, chief executive of the London Bullion Market Association.
Bullish gold bets on Chicago’s Comex market, the primary futures benchmark for gold among Western investors, hit a new post-COVID high, with more than 100 tonnes added in the week ending August 13, according to data from the U.S. Commodity Futures Trading Commission. While the futures market attracts hedge funds and speculative traders, ETFs are a preferred option for institutional and retail investors in North America and Europe to gain exposure to bullion.
Gold has been on a strong upward trajectory since the end of 2022, bolstered by emerging market central banks diversifying reserves away from the dollar and significant demand from Chinese investors. However, the recent surge from around $2,300 per troy ounce in June to new highs seems to be driven by U.S. and European buyers anticipating lower borrowing costs, which typically enhance gold's appeal compared to yield-bearing assets like bonds.
“What we have seen is investors and speculators in the West starting to return to the gold market,” noted John Reade, chief market strategist at the World Gold Council. “This has been fast money that has been driving gold.”
Ahead of Federal Reserve Chair Jay Powell's speech on Friday, gold prices have been buoyed by expectations of a U.S. interest rate cut in September. Markets are predicting nearly a one percentage point reduction by the end of the year.
“There’s been a party going on in gold prices, and ETF investors just weren’t invited,” said Robert Minter, director of ETF investment strategy at Abrdn. “Now with Powell hinting at a coming rate cut, the invitation’s out.”
Additional support for gold prices has come from opaque over-the-counter purchases, particularly by family offices concerned about potential dollar devaluation.
In India, demand has surged recently, driven by traditional Diwali festival buying and a reduction in import duties that took effect last month.
“India is seeing huge amounts of physical demand for gold,” said Crowell. “It’s really a question of how quickly they can get metal into the country, in terms of number of flights.”
