Investors are buying up gold stocks before the first US rate cut...

Investors are buying up gold stocks before the first US rate cut -AFR

Gold prices have just set a fresh record and are set to climb even further to $US2600 this year boosted by looming US interest rate cuts, a weakening dollar and central bank buying. The strength of the rally in the precious metal has defied analysts expectations, with the spot price up 21 per cent so far this year to hit $US2509.65 an ounce on Friday. That has also helped buoy gold producers on the ASX, which are among the best performers this year. Fund managers say they could rally further.“There are certainly more tailwinds in the next year or so,” said ANZ senior commodity strategist Daniel Hynes, adding that prices were already nearing his short-term target of $US2500. “I wouldn’t be surprised to see it above $US2600 this year.”

The latest leg higher followed US economic data last week which cemented expectations of rapid and deep interest rate cuts by the Federal Reserve starting next month. Markets are pricing in around a one-in-four chance of a large half a percentage point cut by the Fed in September, which would take the benchmark to the 5 per cent to 5.25 per cent range. Traders also expect four 25 basis point US rate cuts before Christmas and another four in 2025. Gold is traditionally considered a hedge against economic uncertainties, and higher rates tend to weigh on the zero-yield asset.

As a guide, gold prices have climbed 6 per cent on average at the start of the last four easing cycles in the world’s largest economy, and most of the appreciation happened before the first-rate cut, noted Mr Hynes. The commodity value rises further during the easing cycle, he added. Perennial Partners is among investors who are already betting on such an outcome. Perth-based fund manager Sam Berridge, who oversees the firm’s Natural Resources Trust, started to snap up Australian gold stocks months ago on signs that high US borrowing costs were hitting consumers. At the time, financial markets barely anticipated lower interest rates, ascribing just one rate reduction before Christmas this year, he recalled. “We suspected that as the economic data continued to deteriorate, the number of cuts would increase,” he said. The outcome would be lower borrowing costs and probably lower real rates, both supportive of gold prices.
Katana Asset Management said the biggest reason to invest in gold was the outlook for the US dollar. Perth-based portfolio manager Romano Sala Tenna said the US government had already borrowed at a faster pace than the economy was able to grow. This, he predicted, would erode the value of the US dollar as bond buyers diversify away from US Treasuries. A weaker greenback makes gold cheaper for purchasers holding other currencies. “The only other asset investors can own in scale is gold,” he said. That’s why we are seeing central banks buying gold in record amounts. World Gold Council data showed central banks in Turkey, India, China and Poland were the largest buyers of physical gold this year, even though China has been sitting on the sidelines in the past months. Mr Sala Tenna said he was optimistic that Beijing would resume its purchases and push the commodity price even higher. He also anticipates retail investors to return to the asset class through exchange-traded funds. “Investors are very underweight gold, and we’re going to see a bit of FOMO (fear of missing out),” he said.

Ray Attrill, head of FX strategy at National Australia Bank, also said that gold was a key beneficiary of cryptocurrencies falling out of favour ahead of the US elections. He noted that digital currencies had rallied on Donald Trump returning to the White House. Crypto prices have since retreated after US Vice President Kamala Harris announced her decision to run, as markets priced in the chance of winning in November. Bitcoin traded at $US58,516 on Monday, down from over $US70,000 in late July.
Source; AFR