Gold Q3 Fundamentals Forecast
Gold is currently trading around $1,900 per ounce, about $100 higher than the starting level for Q2 2024 and having hit an all-time high in mid-May. In the global interest rate environment, the expected interest rate cuts, especially in the United States, have not materialized as inflation continues to outpace central banks' forecasts. Central bank purchases, especially in China, have shifted the supply-demand balance in favor of higher prices. However, a pullback in demand could put downward pressure on gold. Additionally, the political risk premium that has supported gold has diminished but could re-emerge at any time, especially with several high-profile elections on the horizon. There are a number of factors that gold traders should closely monitor in Q3.
US interest rate cuts delayed
At the beginning of 2024, financial markets were expecting four to five 25 basis point rate cuts from the Federal Reserve, with the first cut expected to occur in the second quarter. This forecast has been revised downward significantly in the past few months and is now expected to result in one, and more likely two, rate cuts at the November Federal Open Market Committee (FOMC) meeting, which is consistent with the latest FOMC end-of-year forecast.
FOMC June Dot Plot Forecast
Source: LSEG Datastream
As interest rates in the United States remain high, the opportunity cost of holding non-yielding assets like gold increases. Interest-bearing investments such as bonds become more attractive as they provide income through interest payments. As a result, investors may choose to shift their funds out of gold and into assets that provide yields or income based on current interest rates.
At the start of 2024, the interest-rate sensitive US 2-year Treasury note traded with a yield of around 4.25% as a range of interest rate forecasts were priced in. In May of this year, the same bond offered a yield of over 5%, dragging down gold prices. The higher US Treasury yields remain, the more they will weigh on gold prices.
US 2-year Treasury yield chart
Source: TradingView, created by Nicholas Cawley
Now that you have a thorough understanding of the fundamentals influencing gold in Q3, why not download our full Q3 gold forecast to see what the technical setup suggests.
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Central Bank Demand for Gold
According to the World Gold Council, central banks purchased an additional 1,037 tonnes of gold in 2023, the second-largest annual purchase in history, following a record 1,082 tonnes in 2022. According to the 2024 Central Bank Gold Reserves Survey, conducted between February 19 and April 30, 2024 with a total of 70 responses, 29% of responding central banks plan to increase their gold reserves within the next 12 months, “the highest level since the survey began in 2018.” The survey noted that the planned purchases are motivated by “a desire to realign gold holdings, domestic gold production, and financial market concerns such as rising crisis risks and rising inflation to more favorable strategic levels.” These planned purchases should support gold prices in the medium term and offset the prolonged high interest rate environment.
Figure 4: How do you expect your institution's gold reserves to change over the next 12 months?
Source: World Gold Council
Potential impact of upcoming elections on markets
The second half of 2024 will see a series of important general elections across the world, including a possible rematch in the United States between incumbent President Joe Biden and former President Donald Trump. This election is expected to be highly contested and will likely be a source of increased market volatility in the period leading up to the November 5 vote. While the last presidential election was close and Donald Trump claimed voter fraud as the reason for his loss, this year both parties have expressed concerns about foreign interference and media bias. Monitoring the events surrounding this year's election will be crucial.
In addition to the US election, early general elections are planned in France and the UK, where Labour is expected to take power at No. 10 Downing Street for the first time in 14 years, while in France a far-right party is expected to take power after making big gains in the recent European Parliament elections.
Geopolitical risks and demand for safe haven assets
Beyond the general elections, ongoing global conflicts in Ukraine, Gaza and across the Middle East continue to pose risks. These conflicts could escalate at any time, potentially increasing demand for gold as a safe haven asset.