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Gold remains in a strong position to test higher levels

Goldman Sachs Research forecasts the price will reach $2,700 by early next year

Published: Sun 22 Sep 2024, 5:46 PM

By
Issac John

Shoppers browse jewellery at a store window in Dubai. — File photo

With the US rate cuts markedly burnishing gold’s safe-haven appeal, the precious metal surged to a new record high on Friday, reaching 2,626 per ounce, supported by renewed market expectations of further rate cuts.

Precious metals analysts say the new milestone places gold in a strong position to test higher levels, with the next targets in the $2,649.43 to $2,660.90 range. Support is expected at $2,546.86, and stronger backing lies at $2,477.18, where the 50-day moving average offers intermediate support.

They said with the prospects of interest rates dropping further, the opportunity cost of holding non-yielding assets like gold is reduced, enhancing gold’s appeal as a safe haven during economic uncertainty.

Analysts believe that the yellow metal is on track to close strong, near the highs for the period. After hitting new record high of 2,626, gold continues to trade near the highs for the day — well on its way to the next higher target zone that begins at 2,650 and goes to 2,661.

Rania Gule, senior market analyst at XS.com, told Khaleej Times that the price hike is driven by various economic and geopolitical factors, raising questions about gold’s future as a haven amidst ongoing global tensions. “In my view, the weakening dollar is a primary driver of increased demand for gold, which, despite offering no direct yield, remains attractive to investors looking to safeguard their wealth in an environment where returns from other assets are diminishing,” said Gule.

Goldman Sachs Research forecasts the price will reach $2,700 by early next year, buoyed by further interest rate cuts and gold purchases by emerging market central banks. The metal could get an additional boost if the US imposes new financial sanctions or if concerns mount about the US debt burden.

“Gold is our strategists’ preferred near-term long (the commodity they most expect to go up in the short term), and it’s also their preferred hedge against geopolitical and financial risks,” the bank said. “In this softer cyclical environment, gold stands out as the commodity where we have the highest confidence in near-term upside,” Goldman Sachs Research strategists Samantha Dart and Lina Thomas wrote. They point to three factors in particular that could push prices higher. These include central bank purchases, impending Fed cuts, and potential geopolitical shocks.

Since Russia’s invasion of Ukraine in 2022, central banks have been buying gold at a brisk pace — roughly triple the amount prior. Goldman Sachs Research expects the buying spree to persist amid concerns about US financial sanctions and the growing US sovereign debt burden.

“Gold is significantly under-owned in Western markets and remains one of the few assets that can counter fiscal threats,” said Ryan McIntyre of Sprott Asset Management. He stressed that alongside rate cuts, ongoing US dollar debasement and uncertain fiscal policies across Western economies are driving increased interest in gold.

As the dollar weakens, non-dollar investors find gold more attractive, further supporting the metal’s rally, analysts said. Gold has gained over 26 per cent so far in 2024, bolstered by geopolitical tensions in the Middle East and Europe, adding layers of uncertainty that traditionally benefit gold.

They argue that further rate cuts by the Fed will likely bring Western investors back into the gold market after largely being absent during the metal’s sharp rally over the past two years. Gold offers significant value as a portfolio hedge against developments such as tariffs, Fed subordination risk, and debt sustainability fears. “Our researchers see roughly 15 per cent upside in gold prices under a rise in financial sanctions equal to the rise seen since 2021, and similar gains if mounting debt concerns spur US government credit-default swap spreads (a measure of credit worthiness) to widen by 1 standard deviation (13 basis points).”

“From a fundamental perspective, I believe gold is well-positioned to continue its upward trend shortly, supported by a weakening dollar and ongoing economic and geopolitical concerns. However, it is essential to keep a close watch on market developments, as any changes in monetary policy or de-escalation of geopolitical tensions could trigger a correction in gold prices. Therefore, I suggest that investors and traders remain cautious about potential price pullbacks while taking advantage of opportunities if the current trends continue to support further gold price rises,” said Gule.