Gold hits record highs as investors bet on rate cuts

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Western investors piled into gold again as they brace for a U.S. interest rate cut later this year, helping push prices to record highs this week.

Prices hit $2,531 a troy ounce in Tuesday’s trading, taking gold’s gains for the year to more than a fifth, boosted by buying by institutional investors and bullish bets by hedge funds.

Holdings of physically backed gold ETFs have risen by 90.4 tonnes, equivalent to $7.3 billion, since May, according to data from the World Gold Council, an industry body. Net inflows have been positive in seven of the past eight weeks.

The buying spree ends a period in which Western investors have largely sat on the sidelines of gold’s 20-month rally, which has been fueled by Chinese investors flocking to the metal as they seek refuge from chaos in their home markets of stocks and real estate.

“The West is waking up to what Asia watched earlier this year,” says Ruth Crowell, chief executive of the London Bullion Market Association.

Gold bullish bets on Chicago’s Comex market, the main gold futures benchmark used by Western investors, hit a new post-Covid high, adding more than 100 tonnes in the week ended Aug. 13, according to Commodity Futures Trading Commission data from US.

The futures market is primarily used by hedge funds and speculative traders, while ETFs are popular in North America and Europe as a way for institutional and retail investors to gain exposure to bullion.

Gold has been on a high since the end of 2022, supported by emerging market central banks trying to diversify their reserves away from the dollar, as well as huge demand from Chinese investors.

But the metal’s latest rally from around $2,300 a troy ounce in June to new highs appears to have been driven by US and European buyers positioning for lower borrowing costs. Lower borrowing costs tend to make gold, which has no yield, more attractive compared to assets like bonds.

“What we’ve seen is that investors and speculators in the West are starting to come back into the gold market,” says John Reade, chief market strategist at the World Gold Council, an industry body. “This was fast money that spawned gold.”

Ahead of Friday’s speech by Federal Reserve Chairman Jay Powell, gold prices were supported by expectations that the US central bank will cut interest rates in September. Markets are pricing in nearly a percentage point off through the end of the year.

“This time gold did well even before the rate cut cycle started, so the question is how much the additional (expected) rate cut gains will support,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Financial investors also flocked to bullion as a safe-haven amid growing concerns about high levels of government debt and geopolitical instability, Hansen added.

Opaque purchases in the over-the-counter market, particularly by family offices worried about a potential devaluation of the dollar, also lifted gold prices.

Demand from India has also picked up in recent weeks due to traditional purchases for the Diwali festival and the cut in import duties that came into effect last month.

“India is seeing huge amounts of physical demand for gold,” Crowell said. “It’s really a question of how quickly they can get metal into the country, in terms of the number of flights.”