Will Gold Extend the Rally as Recession Worries Mount?
Gold price hit another record high of $2,483 in July.
The 16% year-to-date return is already higher than the average annualized return of the past 5, 10, and 20 years, which is 11.2%, 6.6% and 9.6%, respectively.
Gold price, for now, is stable and near record level despite the huge volatility recently seen in the equity and FX markets, caused by growing US recession fears and unexpected BoJ hike. But the question is - will the gold extend the rally in the coming months?
Gold Performance during Recessions
Since the probability of US recession has been rising, markets are now pricing in 50bp cut in September, followed by aggressive 225bp cut by the end of 2025. FED chair Powell is expected to give a green light for September cut in Jackson Hole Economic Policy Symposium Aug 22-24.
Falling interest rate has historically been a bullish catalyst for the yellow metal. In the seven rate-cut cycles during the past 40 years, gold rose by 11% on average within one year after FED’s first cut. Interestingly, while rate cut is also a tailwind for US equity, it was the gold that outperformed with lower volatility.
In the last eight US recessionary periods, gold has gained 12.23% on average and delivered six positive returns.
If history is any indication, we should be confident about gold performance in the coming months and years.
Who is Buying Gold?
Total gold demands in Q2 increased by 4% y/y to 1258 tons, the highest since 2000, according to World Gold Council.
OTC demands soared by 53% y/y to 329t, offsetting the decrease in Jewelry fabrication (410t) and bar and coin (261t). Central bank is absolutely one of the biggest buyers, contributing 183t in total in Q2, +6% y/y. And the total demands from CBs in H1 hit the highest on record.
Considering the factors including inflation risks, geopolitical tensions, currency depreciation and portfolio diversification, 81% of the banks (especially from EM countries) in a survey conducted by World Gold Council indicated that they will continue to increase their gold reserves over the next 12 months, with 19% unchanged.
Gold to Shine amid Uncertainty?
The US election is just around the corner. With Biden dropping out of the campaign and the close game between Trump & Harris, there is huge uncertainty surrounding the economic and social agenda domestically and geopolitical tensions globally (War in Middle East or relationship with China). Will we see any black swan event within the last few months of Biden administration?
The table above shows that gold price jumped under each of the presidency since 2000, no matter who is in the White House.
Another elephant in the room is the US public debt that has just surged above $35tn. The annual interest payment is expected to exceed the defense spending in fiscal year 2024.
Will the exploding debt evolve into a financial crisis or government bankruptcy? Maybe not. But in the long run, US economy would be hurt if it could not be funded sustainably, and its superpower status would therefore be questioned. Unfortunately, neither Trump nor Harris has a concrete plan to turn it around.
Gold Price in August
In the past 20 years, gold added 1.2% on average in August (the fourth best month throughout a year), with a 60% chance of a positive monthly return.
The yellow metal, however, is under pressure early August and testing the positive trendline and key 50-day moving average. A break below $2,355 could drag the price to $2325, and further toward $2300, which is 38.2% retracement level of Feb-July rally.
If gold can hold above the trendline, the bulls will aim for a fresh high.
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