SUPERNEWS

Macro

Gold Rally Predicted to Soar Amid Fed Cuts, Central Bank Buys

Gold's rally, fueled by Fed rate cut expectations and central bank purchases, may continue despite potential ETF lag.

By Bill Bullington

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4/9, 23:36 EDT
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Key Takeaway

  • Gold's near-20% surge since mid-February is expected to continue, driven by anticipated US Federal Reserve rate cuts and global safe-haven demand.
  • Central bank purchases, especially from China, are significantly bullish for gold, with over 1,000 tons bought in 2022 and 2023.
  • Despite a potential short-term correction, the lack of investor demand in gold-backed ETFs suggests room for future price increases once the Fed cuts rates.

Gold's Unstoppable Rally

Gold has experienced a remarkable rally, with prices surging nearly 20% since mid-February. This surge is attributed to a confluence of factors, including expectations for the US Federal Reserve to lower interest rates, geopolitical tensions in the Middle East and Ukraine bolstering demand for safe-haven assets, and significant purchases by global central banks. Rajeev De Mello of GAMA Asset Management SA highlights the momentum-driven nature of gold, suggesting that while a slight correction might occur, it is likely to attract more buyers due to the metal's relatively small market size.

Central Banks Fuel Demand

Central banks have played a pivotal role in gold's rally, with purchases exceeding 1,000 tons in 2022 and 2023, led by economies like China seeking to diversify away from the dollar. Matthew Schwab of Quantix Commodities, managing a $933 million fund, emphasizes the bullish signal from central bank enthusiasm, with his fund maintaining a significant overweight position in gold. Duncan MacInnes of Ruffer Investment Co. points out the permanence of central bank purchases, contrasting it with the more transient nature of ETF holdings, underscoring the long-term bullish outlook for gold.

ETFs Lag Behind

Despite gold's ascent, investor demand for gold-backed exchange-traded funds (ETFs) has been tepid, with total holdings near their lowest since 2019. Ben Ross of Cohen & Steers attributes this to investors chasing returns in the money market. However, he anticipates that the Fed's planned rate cuts will eventually drive fresh inflows into ETFs, further boosting gold prices. This potential influx of ETF investment could create a squeezed market, according to MacInnes, amplifying the rally.

Street Views

  • Rajeev De Mello, GAMA Asset Management SA (Bullish on gold):

    "The current momentum is a signal to increase holdings in gold... It’s a very momentum driven asset, really."

  • Matthew Schwab, Quantix Commodities (Bullish on gold):

    "What I think is really, really bullish about gold is that those ounces will be taken off the market and never come back. And that’s clearly very different to the ETFs where ultimately everyone’s a trader of it."

  • Duncan MacInnes, Ruffer Investment Co. (Bullish on gold):

    "He last month increased his exposure to gold and silver to roughly 8% across his two portfolios."

  • Ben Ross, Cohen & Steers (Bullish on gold):

    "But once the Fed actually deploys its planned rate cuts, that will eventually trigger fresh inflows into ETFs and give gold prices a further boost."

  • Jay Hatfield, Infrastructure Capital Advisors (Neutral/Bearish on bullion's continued run):

    "Has no plans to add gold in the next 12 months..."

  • Darwei Kung, DWS Group (Bullish into the second half on Gold): > "Kung is still bullish into the second half and expects more participants to increase allocations."