Gold keeps hitting fresh record highs. Here’s what could lift it closer to $3,000.
Gold prices have rallied to fresh record highs three times in less than three weeks, topping $2,500 an ounce at their peak, with the potential to rise even further as the precious metal’s distinction as a “protective asset” continues to take hold.
Gold for December delivery GCZ24 GC00 climbed $7.80, or 0.3%, to settle at $2,480.80 an ounce on Comex Thursday. It traded as high as $2,506.60 during the session to touch a new record intraday high. Prices had previously climbed to intraday records on July 17 and July 31.
Most Read from MarketWatch
“There can be no question that geopolitical uncertainties surrounding the conflicts in Europe and the Middle East, coupled with continuing belligerence from China toward Taiwan and an increasingly ugly U.S. presidential election, still encourage investors to seek to increase exposure to protective assets such as gold,” George Milling-Stanley, chief gold strategist at State Street Global Advisors, told MarketWatch Thursday.
Read: Gold’s not behaving the way it usually does in election years. Here’s why.
Downbeat economic data
The metal has found support against a backdrop of downbeat U.S. economic data, central bank buying, weakness in the dollar, and tensions in the Middle East, analysts said.
Data released Thursday show U.S. manufacturing activity saw a sharper-than-expected contraction, with the Institute for Supply Management’s manufacturing index at 46.8%, down from 48.5% in June. It was down a fourth straight month to an eight-month low.
The number of Americans who applied for unemployment benefits last week also climbed by 14,000 to a nearly one-year high of 249,000.
The data “reinforces market hypothesis about multiple rate cuts this year,” said Samer Hasn, market analyst at XS.com, in emailed commentary.
Lower rates can weaken the dollar and make gold more competitive against interest-bearing investments.
Interest-rate outlook
The economic figures, combined with Federal Reserve Chairman Jerome Powell’s remarks after the central bank’s policy meeting Wednesday, “have made markets almost certain of a cut in September and one or two possible cuts in November or December,” said Hasn, citing the CME FedWatch Tool.
Powell on Wednesday said he didn’t want to give specific forward guidance about the “the pace” of future interest-rate cuts. The Fed will have three more meeting before the year is done — in September, November and December, and Powell said he could “imagine a scenario in which there would be everywhere from zero cuts to several cuts.”
The market had been looking for reassurance from the Fed chairman that the central bank would start cutting rates at its September meeting,, said Milling-Stanley.
“Powell, as usual, made no promises, but markets interpreted the tone of the official statement and Powell’s comments to the press as indicating that that a rate cut in September remains on the table,” he said.
By far, interest-rate trends have been the bigger influence on gold than events in the Middle East, said Tim Hayes, global investment strategist at Ned Davis Research.
The 10-year Treasury yield BX:TMUBMUSD10Y and Barclays Global Aggregate Bond yield have reached their lowest levels since March, which is “bullish for gold given its inverse correlation with yields,” said Hayes. He explained that since gold doesn’t pay interest, it’s “competitive advantage” with bonds improves when yields decline.
Expectations for a Fed rate cut are helping to support gold prices, and globally, central banks have started cutting interest rates, he said. The Bank of England on Thursday cut its main interest rate by 25 basis points to 5%.
Gold also benefits from weakness in the U.S. dollar, which has been under downward pressure, and central bank buying remains a positive long-term influence. The ICE U.S. Dollar index DXY edged up by 0.2% to 104.35 in Thursday dealings, but trades 1.4% lower quarter to date.
Read: Record percentage of central bankers expect gold holdings to increase
$2,500 and beyond
Against that backdrop, gold has climbed, with futures prices on Thursday marking a new all-time settlement high.
The Gold Midyear Outlook for State Street’s Gold strategy team indicated that gold could trade between $2,200 and $2,500 for the remainder of the year “if there are no significant changes in the economic and political backdrop,” said Milling-Stanley.
Prices for the metal climbed above that high mark Thursday.
If the economic and political environment becomes “more favorable for gold — for example, with growing weakness in the dollar because of rate cuts — a trading range for the metal of between $2,500 and $2,700 could be possible,” said Milling-Stanley.