Gold prices have reached new heights, surpassing $2,000 per ounce, and experts believe this could be just the beginning of a larger rally. Analysts at Société Générale predict that gold prices will remain around $2,200 per ounce for most of 2024.
In their latest commodity outlook, the French bank highlighted several key factors that could contribute to gold prices reaching all-time highs in the coming year. Despite elevated bond yields, the bond market is seen as less risky for gold. The market’s resilience is attributed to significant volatility, which limits the impact of higher bond yields on gold.
The analysts explained that when treasury bonds experience high levels of volatility, the value of future cash flows attached to a coupon strip decreases compared to non-interest-bearing assets like gold. Therefore, the current bond market volatility diminishes the advantage of bonds over gold.
Additionally, another factor that could limit gold’s downside is the outlook for U.S. monetary policy. The growing expectation is that the Federal Reserve will cease raising interest rates as inflation pressures weaken and the economy cools. These expectations are reflected in the market, which is pricing in rate cuts for the future. A potential tailwind for gold is the likelihood of a peak in U.S. interest rates occurring earlier than in other OECD economies, signaling possible dollar weakness and thus benefiting gold.
Furthermore, the threat of an impending recession may prompt the Federal Reserve to cut rates before resolving inflation concerns. This would provide further momentum to the rally in gold prices.
Central bank demand for gold is yet another critical factor supporting the precious metal. Currently, central bank demand accounts for 7.9% of global supply, illustrating their ongoing efforts to diversify their reserves. Société Générale expects central bank gold purchases to continue in the long term, further bolstering gold prices.
Overall, with diminishing bond market volatility, the potential for lower and earlier U.S. interest rates, and continued central bank demand, gold prices could soar to new heights in the foreseeable future.
Why are gold prices expected to reach all-time highs?
Gold prices are predicted to reach all-time highs due to several factors. These include diminishing bond market volatility, the possibility of lower and earlier U.S. interest rates, and strong central bank demand for gold.
How does bond market volatility affect gold prices?
When bond market volatility is high, the value of future cash flows attached to bonds decreases compared to non-interest-bearing assets like gold. This decrease in the advantage of bonds over gold allows gold prices to remain resilient despite elevated bond yields.
What impact does U.S. monetary policy have on gold prices?
The outlook for U.S. monetary policy, including the possibility of a peak in interest rates and rate cuts in the future, can have a significant impact on gold prices. If U.S. interest rates decrease earlier than rates in other OECD economies, it could signal dollar weakness and provide a tailwind for gold.
Why is central bank demand important for gold prices?
Central banks play a vital role in supporting gold prices through their ongoing purchases. These purchases are driven by the desire to diversify their reserve base. As long as central banks continue to buy gold, it will act as a long-term supporting driver for gold prices.