1 Based on London Bullion Markets Association AM price 2 See our model described in Gold: how we value the precious metal
Source: Dario Caldara and Matteo Iacoviello’s Geopolitical Risk Index based on a tally of newspaper articles covering geopolitical (war) tensions, Bloomberg, WisdomTree. January 1986 – September 2024. Historical performance is not an indication of future performance and any investments may go down in value.
Figure 2. Gold and geopolitics
Our internal model points to a fair value of gold at the end of September 2024 of circa $2,360/oz (i.e. 27.5% year-on-year gains). As prices rose close to 43% year-on-year to $2,639/oz at the end of September, there is potential for some pullback. However, the additional strength in gold may have come from central bank buying activity, increased retail demand from markets like India (where import duties have been slashed) and increased Exchange Traded Commodity (ETC) buying volumes. While these additional factors are not in the model, as we historically could not prove their statistical significance, the volumes of buying from central banks, in particular, are on a much larger scale than in past years and likely to be helping gold prices. Heightened geopolitical risks are supporting gold prices. Israel and Iran are on the brink of war after Iran launched a missile attack on Israel in early October, and some form of retaliation is widely expected. The geopolitical index depicted below was elevated in September, and the recent escalation of risk in the Middle East will have pushed it up further.
Source: Bloomberg, WisdomTree price model, data as of September 2024. Speculative positioning is net non-commercial positioning in gold futures markets (i.e. netting shorts away from long positions as reported by the Commodity Futures Trading Commission). Treasury yields is the nominal yield to maturity on a 10-year US Treasury Bond. Inflation is the annual growth of the US Consumer Price Index. Dollar Basket (DXY) is a measure of the value of the US Dollar against a basket of currencies (Euro, Swiss franc, Japanese Yen, Canadian Dollar, British Pound and Swedish krona). Actual gold price is the annual growth in spot gold prices. The fitted gold price is the price the model would have forecast. The constant does not have economic meaning but is used in econometric modelling to capture other terms. It can be thought of as how much gold prices would change if all other variables are set to zero (although that would be unrealistic). Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties.
Figure 1. Gold price attribution
Gold hit a brand new high again, topping $2,668.90/oz on 26 September 20241. It appears that all stars were aligned for the metal in September: 1. the US Federal Reserve (Fed) joined many other central banks in cutting interest rates; 2. bond yields fell aggressively; 3. the US Dollar depreciated to a 14-month low; 4. geopolitical risks continue to escalate, and 5. the People’s Bank of China engaged in aggressive monetary stimulus with strong hints of fiscal stimulus to follow from the government. We believe that gold has the potential to keep rising amid a rate-cutting environment, geopolitical anxiety and strong investor sentiment towards the metal. Using WisdomTree’s internal gold model2, we can see that gold hit a clear turning point in the summer of 2024 when the prior headwinds of rising bond yields and US Dollar appreciation gave way to a bond rally and US Dollar depreciation. Thus, all four drivers of gold price in our internal model framework contribute to gold price gains.
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OCTOBER 2024
Gold Outlook to Q3 2025
Important info
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Source: WisdomTree, Bloomberg. Weekly data from March 1995 to October 2024. Historical performance is not an indication of future performance and any investments may go down in value.
Figure 3: Net speculative positioning in gold futures
We expect the US Presidential election in November to be a close contest. Uncertainty about the future tends to support gold buying, and we expect gold to be well-bid in this month. Net speculative positioning in gold futures reflects this strength in gold sentiment. Positioning in gold futures is back to the levels we saw at the outbreak of the Russia-Ukraine war and only 20% from the all-time high in 2020. The combination of geopolitical risks, uncertainty about the interest rate path and, by extension, the strength of the economy are all contributing to investors buying gold.
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Our internal model indicates that US Dollar depreciation boosted gold prices by 1% y-o-y in August and a further 4% y-o-y in September, turning the corner on five consecutive months of US Dollar appreciation headwinds. The question now is, where will the US Dollar go next? The depreciation seemed to have been driven by the expectation that the Fed would catch up with other central banks that had a head start in their rate-cutting cycles. However, markets are moderating these expectations, and rate differentials alone may not provide a further catalyst for dollar depreciation. However, we believe there is reason to expect some downward dollar pressure from rising deficits (both budgetary and trade). These “twin” deficits have historically tended to pull the dollar lower, albeit with a lag. We don’t expect either Presidential candidate to tackle the US's rising indebtedness, and thus, deficits are likely to continue to rise. Regardless of whether the debts come under control, the lagged nature of the relationship indicates that dollar depreciation pressure is already pent-up.
Source: WisdomTree, Bloomberg. January 1997 to October 2024. Daily data. Historical performance is not an indication of future performance and any investments may go down in value.
Figure 5: Gold vs real rates (treasury inflation-protected securities yield)
Figure 4: Gold held in exchange-traded products
It’s not just gold futures that have seen an uptick in interest. Investors have come back into gold Exchange Traded Commodities (ETCs) after close to two years of selling between the May 2022 and May 2024. Since May 2024, there have been approximately 3 million troy ounces of flows into ETCs (i.e. a 3.7% increase), worth $7.8bn (using gold prices as of 10/10/2024). In 2022, gold was competing with a bond market that was getting increasingly cheaper with yields rising. At the time many investors were ignoring the strength in gold prices and opted for the bond market for anti-fragile/defensive exposures. Now that we are back to a rate cutting environment, bonds yields have fallen, and investors are ready to buy gold again.
In September 2024, the Fed cut interest rates for the first time in over four years, following one of the most aggressive rate-tightening cycles ever witnessed. With the Fed starting with a 50bps cut, the market became optimistic that the central bank will continue with aggressive strides and cadence through the rate-cutting cycle. US 10-year bond yields fell sharply in September. Nominal bond yields fell to 3.62% on 16/09/2024 from 4.16% just two months prior3. Real bond yields fell by a similar magnitude, aiding gold higher. However, strong jobs data and upside surprises to official CPI inflation data published in October (relating to September), have reversed some of this bond rally. While that has presented a headwind for gold, the yellow metal has not fallen as sharply as bond prices in October. We believe the bond correction has largely played out and don’t expect substantial increases in bond yields from here.
Source: Bloomberg, WisdomTree. Jan 1968 to September 2024. Twin deficit is defined as a current account deficit and a government budget deficit. The wider the deficit, the more negative the number. Dollar basket is the US Dollar against a basket of six currencies. Index value increases with Dollar appreciation. Historical performance is not an indication of future performance and any investments may go down in value.
Figure 6: US Dollar and US Twin Deficits
Many analysts have attributed this year's gold rallies to central bank gold-buying activity. According to World Gold Council and Metals Focus, gold buying in the first half of 2024 was the highest on record for H1 purchases. However, after being the largest buyer last year, China has not reported any gold purchases for the past four months up to September. International Monetary Fund (IMF) data indicates that net gold purchases slowed to just 8 tonnes in August, the lowest since March. Despite this, gold had still rallied to new highs in August and September. We, therefore, believe it's not central bank buying alone that has fuelled gold prices this year. Based on the IMF data to August 2024, Turkey, India and Poland are the leading buyers this year, with China slipping into fourth place after pausing its purchases.
Source: WisdomTree, World Gold Council, Q1 2010 to Q2 2024. Historical performance is not an indication of future performance and any investments may go down in value.
Figure 7: Central bank demand for gold
3 Bloomberg
Source: WisdomTree Model Forecasts, Bloomberg Historical Data, data available as of September 2024. Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties
Figure 8: Gold price forecast
Gold outlook using WisdomTree’s forecasts model Using WisdomTree’s internal gold model2, we can produce gold forecasts that are consistent with several macroeconomic scenarios. We note that assessments of the economy are especially varied at the moment, and market consensus is shifting quickly. As we discussed previously, the market appeared more optimistic about the pace and size of monetary loosening than the Fed expects, based on its published dot plots. Indeed, stronger-than-expected labour market data and stubborn inflation are driving markets to moderate their expectations. Incoming data on economic activity, labour market and prices over the next month in the US could be affected by hurricane disruptions, the longshoreman strike and election preparations, so we may get a broader range of interpretations compared to normal.
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Bear case
Bull case
Consensus
Our consensus scenario takes the Bloomberg Survey of Professional Economists' average views on inflation, the US Dollar and Treasury yield forecasts. Consensus is looking for inflation to continue to decline (and settle close to but slightly above the central bank target), the dollar to depreciate, and bond yields to decline. Although consensus does not expect bond yields to go back to mid-September lows, there is an expectation of lower yields from current levels. Consensus is based on the Fed cutting rates from 5.00% in September 2024 to 3.50% in September 2025. Without a consensus forecast on gold sentiment, we reduce speculative positioning to 260k, from over 300k at the time of writing (14 October 2024). Given the geopolitical risks mentioned earlier, the higher-than-average positioning seems appropriate. Gold is a highly sought after asset in times of economic, financial, and geopolitical stress, and these triggers could drive sentiment towards the metal even higher. In the consensus case scenario, gold reaches US$3,030/oz by Q3 2025, clearly above the September 2024 high, although prices may moderate a little in the coming months before we get there.
In this scenario, inflation remains stuck at a higher setting, possibly due to trade or specific commodity shocks. The Fed nevertheless continues its cutting cycle, acknowledging the sources of inflation are beyond its control and moving in a manner consistent with other parts of its triple policy mandate (i.e. maximum employment and moderate long-term interest rates). Meanwhile, a combination of elevated geopolitical risks and fears of policy errors keeps sentiment towards gold higher (expressed in speculative positioning). In this scenario, gold could reach US$3,360/oz by Q3 2025.
This scenario represents a reassessment of Fed policy, with the central bank not delivering anywhere close to the rate cuts consensus has priced in. Bond yields continue to rise. At the time of writing (14 October 2024), US 10-year bond yields have risen to 4.10% from a low of 3.62% in mid-September. In the bear scenario, bond yields rise to 4.30% and stay there. With the Fed no longer catching up with other central banks, the US dollar appreciates. Inflations falls below target in a tight monetary setting. We also reduce net speculative positioning in this scenario, with the assumption that some of the geopolitical risk cools and are not replaced with new recession fears. In this scenario, gold initially falls to $2,200/oz at the end of Q4 2024, with the brunt of the correction front-loaded. Gold then finishes the forecast horizon (Q3 2025) at $2,440/oz.
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Inflation forecast
Nominal 10-year yields forecast
US$ exchange rate forecast (DXY)
Speculative positioning forecast
Gold price forecast
Q4 2024
Q1 2025
Q2 2025
Q3 2025
2.5%
2.1%
2.2%
3.72%
3.68%
3.67%
100.6
100.1
99.8
99.1
300,000
280,000
270,000
260,000
US$2,510/oz
US$2,750/oz
US$2,900/oz
US$3,030/oz
2.8%
2.9%
3.2%
3.4%
3.1%
3.0%
2.95%
101
100
99
98
350,000
US$2,635/oz
US$2,950/oz
US$3,160/oz
US$3,360/oz
1.8%
1.7%
1.6%
4.30%
104
105
106
107
150,000
100,000
50,000
US$2,200/oz
US$2,340/oz
US$2,380/oz
US$2,440/oz
Source: WisdomTree. October 2024. Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties.
2 See our model described in Gold: how we value the precious metal
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Source: WisdomTree. September 2024. Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties.
Source: WisdomTree. Bloomberg Survey of Professional Economists. September 2024. Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties.
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