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On Friday, it looked like the gold price might be on track to hitting a new record high when it jumped more than $5 per ounce to $2 391 – not far from the next round number at $2 400 per ounce and an important barrier to march higher.
But on Monday, there was no trace of the previous week’s optimism. Gold fell by nearly $10 in early morning trade and was close to $18 lower by late afternoon.
Alex Kuptsikevich, senior market analyst at FXPro, says the sudden drop in the gold price after last week’s strong rise highlights the mindset of key market participants: “They are ready to sell.”
He says that while gold has been on an upward trend since the last few days of June, it seemed to hit a peak on Friday after the dollar declined, but a closer look at US employment data quickly changed sentiment in the market.
“The weakness in the labour market increased expectations of a rate cut soon, which boosted risk appetite. But it proved to be a[n] unsustainable play,” says Kuptsikevich.
“Not all the negativity in the macro economy is disinflationary. It was just the opposite. We saw confirmation of wage growth above inflation (4.1% year-on-year compared to inflation of 3.3%).
“At the same time, the previous months’ hiring figures were revised downward and the unemployment rate reached a 31-month high.
“Thus, the economic situation (in the US) is deteriorating faster than what inflation is slowing. A rate cut, in this case, would be an attempt to support economic growth rather than remove excessive tightness in monetary policy.”
The likelihood of a cut for ‘bad’ reasons rather than good ones is growing, which is negative for risk appetite in the medium term, he adds.
Gold has so far hit resistance at $2 390, the level at which the price rally reversed in April 2024. For gold to go higher, it needs to stay above $2 360 per ounce.
“However, now we see more chance of further pressure on the gold price,” says Kuptsikevich.
“We see the 50-day moving average at $2 340 as the first signalling point. If this line is stormed without bullish resistance, the price could quickly retreat to the $2 300 area, which is crucial for determining the dynamics for the coming months. A fall below it would be seen as a break of the bullish trend since October.”
Volatility
The volatility in the gold price prompted the World Gold Council to comment that the gold market is a market “in search of a catalyst”.
“Gold has performed remarkably well in 2024, rising by 12% year-to-date and outpacing most major asset classes. Gold has thus far benefited from continued central bank buying, Asian investment flows, resilient consumer demand and a steady drumbeat of geopolitical uncertainty.
“As we look forward, the key question in investors’ minds is whether gold’s momentum can continue or if it’s running out of steam,” it says.
“With a few exceptions, the global economy is showing wavering growth indicators – eager for rate cuts – amid lower but still uncomfortable inflation. And the market’s outlook is not too dissimilar.
“Our analysis suggests that the gold price today broadly reflects consensus expectations for the second half of the year. However, things rarely go according to plan. The global economy, as well as gold, seem to be waiting for a catalyst.”
Likely catalysts?
The organisation believes the catalyst might come from falling interest rates in developed markets, which could attract investment flows into gold, as well as continued support from global investors looking to hedge the risks associated with an equity market that has run hard.
Continued uncertainty brought on by persistent geopolitical tensions will also support gold.
In particular, there seems to be no end in sight for the war in Ukraine. If anything, tensions between Russia and Western countries supporting Ukraine with money and weapons are increasing.
The World Gold Council warns that the outlook for gold is not without risks. “A sizeable drop in central bank demand or widespread profit-taking from Asian investors could curtail its performance.
“However, global investors continue to benefit from gold’s role in robust asset allocation strategies.”
Bears
Dane Viljoen, co-founder of Troygold, says investors should be happy with gold’s performance since the beginning of 2024, despite the market “cooling” recently and the gold price appearing to test the $2 300 support level a few weeks ago.
“Retail investors have been eyeing geopolitical events and various global election outcomes, with some taking profits and others awaiting interest rate decisions by the Fed, with an eye on new and accompanying economic and inflation data,” he says.
He believes the gold price is currently in a higher trading range that is supportive of further appreciation over the medium-term. This makes the case that the downside “should be supported at current levels”.
“The gold price tested the $2 300 level at the 50-day exponential moving average,” says Viljoen, adding that gold continues to see resistance at $2 400 per ounce.
Breaking above the $2 400 mark would be a sign that the bull market – which began when Covid-19 lockdowns ended and Russia invaded Ukraine in 2021 – will continue.
While the US Federal Reserve opted to keep interest rates unchanged at 20-year highs, expectations are that interest rates are bound to start declining.
In a recent note to investors, Troygold said the gold price would be buoyed by lower interest rates, as a fall in the dollar usually supports gold.
“However, the Fed pencilled in only one rate cut this year, which means they’re still not convinced inflation will come down,” it says.
“High inflation also supports the gold price as investors stock up on gold to protect themselves against currency devaluation. And, considering that more than half of all dollars that ever existed were printed since the Covid lockdowns, one would expect sticky inflation, if not hyperinflation.”
Rand
Local investors experienced the pain of a stronger rand on top of the drop in the gold price – but only for a few hours.
Uncertainty in the weeks before the election saw the rand fall to above R19 per dollar. It recovered when the election outcome created expectations of a government that will be positive for business and the economy, strengthening to below R18 per dollar.
It weakened again as the dollar strengthened, reducing the decline in the rand gold price to less than 1%. The rand gold price is still close to 15% higher than at the beginning of 2024 and 18% higher over the last 12 months.
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