The golden pathway to USD4,000

Those who follow my column here know that this is not the first time this year that I’ve highlighted our constructive view on gold. The precious metal has recently broken above its four-month consolidation channel, surpassing our USD3.5 k target more quickly than we expected. From here, we expect gold prices to sustain a “higher for longer” trajectory, propelled by a confluence of fiscal, monetary, geopolitical and currency drivers.

Why is gold breaking out?

The strength of gold prices is not surprising, but the key reasons causing the recent breakout are. Consensus had long held a positive stance on gold, mainly on geopolitical and trade concerns. However, gold had been stuck in a range for months, until late-August when Fed Chair Powell’s dovish Jackson Hole speech was followed by a slump in US jobs market data. At the same time, long-maturity U.S. bond yields attempted to push higher on the back of persistent inflation and risk premium concerns.

Yield curve steepening behind gold price gains

The surge in 30-year government bond yields across G-7 countries illustrated how bond markets were raising tough questions in Developed Markets’ fiscal discipline. Though growing Fed rate cut expectations have been pushing down the short end of the curve, markets now demand higher compensation for longer-maturity government bonds in light of soaring public debt, or what many call higher risk premium. To cope with the steepening in yield curve, many investors are shortening the duration (i.e. the maturity profile) of their bond portfolios. Such erosion of faith towards fiscal policies is further exacerbated by the perceived challenges to the Fed’s independence. All this weighs on the U.S. dollar outlook, reinforcing our view since the year’s start of the need to diversify beyond the USD alone.

Developed markets drove gold ETF inflow

The month of August saw a resumption of net inflows into gold ETFs, driven regionally by U.S, and European investors. This signalled the strong interest of Developed Market investors in building safe haven allocations in reaction to the afore-discussed fiscal and stagflation concerns.

Emerging markets likely to take the baton in the next leg up

Interestingly, Emerging Markets, led by China, took a back seat as regional investors exhibited net gold ETF outflows in August. The weaker-than-expected Chinese gold demand, in general, was reflective of the price spike and a rotation into China equities, which registered stellar performance during the month. Going into the festive season, we expect demand from India and China to revive.

Chinese central bank as an important incremental buyer

The People’s Bank of China (PBoC) is expected to provide another solid pillar to Chinese gold demand, given it has been a consistent buyer for the ninth consecutive month irrespective of prices. Our view is predicated on the observation that gold accounted for only 6.7% of PBoC’s total reserves, a long way from the 70%-plus range reported by many Developed Markets’ central banks.

Higher for longer; Ways to implement

On top of fiscal, stagflation and policy concerns, we cannot underestimate the impact of stubbornly high geopolitical risks, with Trump failing to end the Russia-Ukraine conflict while continuing to add trade uncertainty. Therefore, along with our expected “higher for longer” trajectory, we would view any pullback in gold prices as a “buy on dip” opportunity, with technical support at USD3.5 k and resistance near USD3.76 k. We also see listed gold mining equities as another opportunity and route to express this view, as improved gold price outlook and interest in acquiring gold mines should enhance their profitability outlook and raise valuations.