This year’s rally in gold prices has demonstrated that the precious metal is no longer strictly tied to the interest rate cycle. However, that doesn’t mean lower rates won’t have an impact; discussions at last week’s Jackson Hole symposium in Wyoming about potential rate cuts could give gold an additional boost.
Traditionally, gold is considered a more attractive investment when interest rates are low and other asset classes are underperforming. By that logic, 2024 should have started off weak for gold, given the unexpectedly strong performance of U.S. equities, the resilience of the economy, and the delay in anticipated Federal Reserve rate cuts. Yet, gold has surged 22% this year, outperforming the S&P 500 and recently surpassing $2,500 per troy ounce.
It’s clear that some buyers are focused on factors other than the opportunity cost of holding gold. Central banks, for instance, purchased 483 tonnes of gold in the first half of the year, according to the World Gold Council—the highest amount since the council began tracking this data. Much of this buying spree can likely be attributed to the Russia-Ukraine crisis, particularly the freezing of Russian central bank assets in 2022, which spurred large emerging economies to reduce their reliance on the dollar.
While central bank purchases may fluctuate quarterly—indeed, they were lower in the second quarter compared to the first—this trend seems to represent a structural tailwind for gold demand that is largely independent of other financial system dynamics.
Overlaying this is the traditional portfolio rotation into gold when interest rates decline. Wealthy individuals and financial investors have been increasing their gold holdings. Inflows into gold-backed exchange-traded funds resumed in May, and July marked the third consecutive month of positive inflows, totaling $3.7 billion. Although this trend is cyclical rather than structural, it doesn’t appear likely to reverse anytime soon. Additionally, market volatility this summer may further drive interest in gold as concerns about equity market instability resurface.
Of course, there are scenarios where the appeal of gold could diminish. An acceleration in the equity market rally, higher-for-longer interest rates, and declining geopolitical risk could all work against gold demand. But as things stand, the likelihood of these scenarios seems dim.