Geopolitics Trumps Economics for Gold Prices

Due to lower interest rates and geopolitical tensions, gold was expected to perform strongly in 2024. But can prices preserve record highs with inflation running hotter?

Holding on to Gains

Gold prices have stabilised over the past few weeks as markets have adjusted expectations for the timing of the first Fed interest rate cut to September. Futures markets point to uncertainty even around the potential for more than one rate cut by the end of the year. Only a slim majority is now projecting a 50 basis point rate cut by December. This is a significant shift from the start of the year when six rate cuts were anticipated. Consistent with the outlook for higher rates, US Treasury yields have risen, with the 2-year surpassing 5% and the 10-year at over 4.75%, slowly approaching it.

Higher interest rates would normally pressure gold prices by providing a positive real return on government debt. However, escalating tensions in the Middle East between Israel and Iran have kept demand for safe-haven assets high. Despite hitting all-time highs earlier in the year, central banks, led by China and India, continue purchasing gold to fill their reserves.

Finding New Correlations

Analysts note that gold has largely ignored economic data and is holding onto gains despite being technically overbought. Geopolitics now appears to be the primary driver of prices, as gold has recently decoupled from Treasuries. Analysts say further escalation could push prices to $2,500 per ounce. Rhetoric from Israel and Iran intensified after Israel responded to missile attacks overnight, threatening additional strikes on nuclear facilities, with Iran warning of retaliation.

Discussions of nuclear weapons in the Middle East undermine market stability, sustaining demand for safe havens such as gold. Recent reports of explosions near Iranian nuclear facilities have exacerbated risk aversion. If tensions subside, gold could resume its typical inverse relationship with Treasury yields, pressuring prices absent signals that the Fed will enact more aggressive rate cuts than currently expected.

Gold Still in Accelerated Trend

The price of gold has continued its trajectory towards historic highs, with measured-move projections from $2100 indicating an upward move to approximately $2550 per ounce. Should buyers regain control of the local top of $2450 and claim the $2500 mark, this would clear the path to the projected target. Alternatively, gold could retest support at the original breakout point if the price slid towards $2200 within normal channel parameters near $2300.

Source: SpreaxEx / Gold

Key Takeaways

Due to lower interest rates and geopolitical tensions between Israel and Iran, gold prices were expected to perform strongly in 2024. However, analysts question whether prices can maintain record highs with hotter inflation. Geopolitical factors now seem to be driving gold more than economic data, as escalating Middle East conflicts sustain safe-haven demand. If tensions subside, gold may resume decoupling against Treasury yields, pressuring prices without signals of more aggressive Fed rate cuts than expected.