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Western investors have piled back into gold as they position for US interest rate cuts this year, helping to drive prices to record highs this week.
Prices reached $2,531 per troy ounce in Tuesday trading, taking gold’s gains for the year to more than a fifth, boosted by purchases by institutional investors and bullish hedge fund bets.
Holdings of physically backed gold ETFs have risen by 90.4 tonnes, equivalent to $7.3bn, since May, according to data from the World Gold Council, an industry body. Net inflows were positive in seven of the past eight weeks.
The flurry of buying ends a period during which western investors largely sat on the sidelines of gold’s 20-month rally, which had been turbocharged by Chinese investors turning to the metal as they sought a refuge from chaos in their local equity and housing markets.
“The west is waking up to what Asia has been tracking earlier this year,” says Ruth Crowell, chief executive of the London Bullion Market Association.
Bullish gold bets on Chicago’s Comex market, the main futures benchmark for gold used by western investors, reached a new post-Covid high, adding more than 100 tonnes in the week ending August 13, according to data from the US Commodity Futures Trading Commission.
The futures market is primarily used by hedge funds and speculative traders while ETFs are popular in North America and Europe as a way for institutional and retail investors to gain exposure to bullion.
Gold has been on a blistering run since the end of 2022, underpinned by emerging market central banks seeking to diversify their reserves away from the dollar, as well as huge demand from Chinese investors.
But the metal’s latest push from about $2,300 per troy ounce in June to new heights appears to have been driven by US and European buyers positioning for lower borrowing costs. Lower borrowing costs tend to boost the attractiveness of gold, which carries no yield, relative to assets such as bonds.
“What we have seen is investors and speculators in the west starting to return to the gold market,” said John Reade, chief market strategist at the World Gold Council. “This has been fast money that has been driving gold.”
Ahead of Friday’s speech by Federal Reserve chair Jay Powell, gold prices have been supported by expectations that the US central bank will cut interest rates in September. Markets are pricing in close to one percentage point of cuts by the end of the year.
“There’s been a party going on in gold prices and ETF investors just were not invited,” said Robert Minter, director of ETF investment strategy at Abrdn. “Now with Powell hinting at a coming rate cut, the invitation’s out.”
Opaque purchases on the over-the-counter market, especially by family offices worried by a potential devaluation of the dollar, have also lifted gold prices.
Demand from India has also surged in recent weeks, due to traditional buying for the Diwali festival and a cut in import duties that took effect last month.
“India is seeing huge amounts of physical demand for gold,” said Crowell. “It’s really a question of how quickly they can get metal into the country, in terms of number of flights.”