Gold Q3 Fundamental Forecast
Gold is currently trading around $1,900 per ounce, approximately $100 higher than its opening level in the second quarter of 2024, having reached a new all-time high in mid-May. The global interest rate environment has seen anticipated rate cuts fail to materialize, particularly in the United States, as inflation persists above the forecasts of various central banks. Central bank purchases, especially from China, have shifted the supply-demand balance in favour of higher prices. However, any pullback in demand could leave gold vulnerable to downside pressure. Additionally, the political risk premium that had supported gold has diminished, although it may resurface at any moment, especially with several high-profile elections on the horizon. Gold traders will have numerous factors to monitor closely in the third quarter.
Delays in US Interest Rate Cuts
At the beginning of 2024, financial markets were anticipating between four and five 25-basis-point rate cuts by the Federal Reserve, with the first move expected in the second quarter. These forecasts have been revised significantly lower over the past few months, currently projecting one or, more likely, two rate cuts starting at the November Federal Open Market Committee (FOMC) meeting. This aligns with the latest FOMC year-end projections.
FOMC June Dot Plot Projections
Source: LSEG DataStream
With US interest rates remaining elevated, the opportunity cost of holding non-yielding assets like gold increases. Interest-bearing investments such as bonds become relatively more attractive because they can generate income through interest payments. As a result, investors may choose to shift their capital away from gold and toward assets that can provide a yield or return based on the prevailing interest rates.
At the beginning of 2024, interest-rate sensitive US 2-year Treasuries traded with a yield around 4.25% as a series of rate predictions were priced in. In May this year, the same Treasuries offered a yield more than 5%, pulling gold lower. The longer US Treasury yields remain elevated, the more they will weigh on the price of gold.
US Treasury 2-Year Yield Chart
