The impact of the Federal Reserve's major shift in monetary policy continues to unfold, and with the official implementation of interest rate cuts, international gold prices have once again reached record highs. As of September 25, 2024, the spot price of gold has approached $2,670 per ounce.
There may be two direct triggers behind this new peak in international gold prices. First, from a purely investment perspective, as the direction and path of the Federal Reserve's interest rate cuts become increasingly clear, the trend of the US dollar exchange rate and interest rates entering a downward channel has been determined. The scarcity of gold determines its value in asset allocation, which has begun to stand out, increasing the investment value of gold and leading to a surge in gold prices. The World Gold Council's September report shows that since the Federal Reserve's interest rate cut information has been traded in the market, global over-the-counter (OTC) gold trading and gold ETF trading volumes have been unusually active, with gold ETFs experiencing net inflows for four consecutive months, led by funds in Western countries.
In fact, US interest rates are often seen as the opportunity cost of holding gold. The Gold Return Attribution Model (GRAM) shows that if the momentum factor of gold returns is excluded, there is a clear substitution relationship between US dollar real interest rates and the cost of holding gold in the global market. Therefore, once US interest rates decline, it will stimulate demand for gold purchases, leading to a rise in gold prices.
Second, from a market sentiment perspective, due to market disagreements on whether the US economy can achieve a soft landing smoothly, the current surge in international gold prices may be a concentrated release of market risk aversion. The main basis for this consideration is the continuous expansion of the US debt scale, leading to a certain collapse of the moat of US dollar credit.
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Gold is a globally recognized safe-haven asset. Following the statement by the US Congressional Budget Office (CBO) this summer that "from 2024 to 2034, the total deficit will be equal to or exceed 5.5% of GDP each year. Deficits have not been at such high levels for more than five consecutive years since at least 1930," the CBO's latest preliminary accounting data shows that as of September 30, 2024, the US fiscal deficit for the fiscal year (from October 1 of the previous year to September 30 of this year) has reached as high as $1.898 trillion, compared to only $1.525 trillion for the same period last year. The growing debt scale has begun to highlight the safe-haven value of gold.
Interestingly, although the academic community has found in causal relationship identification that over a long time period, economic recessions and geopolitical events are either divergent or weakly correlated with the trend of gold prices, historical data regression results between the US fiscal situation and gold prices have found a significant positive correlation between the size of the US deficit and gold prices. That is, if the US fiscal deficit expands, gold prices will rise, and vice versa, gold prices will fall.
This rule has generally held true in the four cycles of gold prices since the 1970s, reflecting a very simple economic logic behind it, which is that gold has a safe-haven attribute, determined by its scarcity. Excluding the demand for gold in jewelry and industrial fields, the surge in international gold prices in this round may also be related to global central banks' enthusiasm for hoarding gold.
Faced with the uncertainty of global economic growth and the complex and changeable geopolitical landscape, the importance of gold as a strategic asset has formed a consensus among global central banks. The World Gold Council's report also shows that despite the rising prices, the willingness of central banks to buy gold has only increased since January of this year. Statistics from the International Monetary Fund (IMF) also confirm that global central banks' gold reserves increased by 37 tons in July alone, a sequential growth rate of 206%.
Looking at the latest monthly data disclosed so far, in July of this year, among global central banks, the National Bank of Poland was the largest buyer, with a net increase of 14 tons for the month, the largest monthly increase since November 2023. This purchase increased its gold holdings to 392 tons, accounting for 15% of total reserves. Since April of this year, the Polish central bank has been buying a large amount of gold, accumulating 33 tons of gold in the past four months. Following are the Central Bank of Uzbekistan (which bought 10 tons that month) and the Reserve Bank of India (which has been net increasing every month since the beginning of this year). In addition, the Central Bank of Jordan has been increasing its gold purchases for three consecutive months, the Central Bank of Turkey for 14 consecutive months, and the Czech National Bank for 17 consecutive months.
In this wave of global central bank gold purchases, only the National Bank of Kazakhstan was a net seller in July this year. Some sovereign wealth funds of countries, such as the State Oil Fund of Azerbaijan (SOFAZ), have also started to increase their holdings. This has led to global gold sales being far less than the gold purchases by global central banks since the beginning of the year. Given the fixed capacity constraints, it is not hard to understand the trend of gold prices.Overall, while the recent rise in international gold prices has been stimulated by the short-term factor of the Federal Reserve's interest rate cut, the momentum suggests that the contribution from global central banks accumulating gold may be even greater. Unless expectations of uncertainty in global economic growth can be reversed, this trend may continue in the short term.
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