Gold price has done well this year, outperforming other assets like stocks, and the rally could continue, according to ING analysts. It has risen by over 17% while the S&P 500 and Dow Jones are up by 12% and 4%.
In a note, the analysts said that they expect gold to continue doing well this year, with their year-end target being at $2,450.
US recession and Federal Reserve actions
The first main reason why gold prices could do well is that the US economy is showing signs that it could move into a recession soon.
Leading indicators have been sending these red alerts for a long time. The manufacturing PMI figure has remained below 50 for a while while consumer confidence has come under pressure in the past few months.
Additional data shows that retail sales have retreated while the housing market is softening. Most importantly, the unemployment rate has risen gradually in the past few months, moving to 4.3%, its highest point since 2021.
Historically, recessions happen at a time when the labor market is softening. Indeed, as I wrote on Monday, the so-called Sahm rule has gradually risen from 0.43%. earlier this year to 0.53%, which is a big red flag for the economy.
Sahm rule is a number that has been a good predictor of recessions over time. In most cases, a recession happens a few months after it crosses the key level of 0.50%.
Additionally, the yield curve has been showing some red alerts. The curve, the difference between the 10-year and 2-year, has been in the inverted zone since July 1st, 2022. This is the longest time that the yield has been inverted.
Most recently, it has shown signs of moving positive, meaning that the 2-year having a smaller yield than the 10-year. While this is a good thing, analysts caution that it could be a sign of a recession.
Federal Reserve rate cuts
These factors could trigger the Federal Reserve to act by starting to cut interest rates. Analysts at ING expect the Fed to deliver a jumbo rate cut in its September meeting and another 0.50% in the next meeting.
By cutting rates, gold will be joining other central banks that have started slashing them like the Bank of England (BoE), European Central Bank (ECB), Riksbank, and the Swiss National Bank (SNB).
Fed cuts are often bullish for gold, in part, because they lead to a weaker US dollar. Recent data shows that the US dollar index has slumped from over $106 earlier this year to $102.
Geopolitical factors
Meanwhile, geopolitical factors could have an impact on gold, according to ING. The war in Ukraine is going on while the Middle East is getting more volatile. Additionally, relations between the US and China are not set to improve under Donald Trump or Kamala Harris.
The biggest geopolitical catalyst for gold was the war in Ukraine, which pushed the US to implement sanctions on the Russian central bank.
In the aftermath, central banks have been accumulating gold since it is the best alternative to the US dollar. In Russia, the central bank holds over 2,330 metric tons of gold while China has over 2,300.
Other central banks like Germany, Italy, France, Switzerland, Japan, and India hold vast amounts of gold.
Notably, some of the top countries like China and Saudi Arabia are reducing the amount of US debt that they hold. This trend is creating more demand at a time when gold supply is not growing as fast. In their note, analysts at ING said:
“The war in Ukraine and the Middle East and tensions between the US and China suggest that safe-haven demand will continue to support gold prices in the short to medium term. The US presidential election in November and the long-awaited US Fed rate cut will also continue to add to gold’s upward momentum through to the end of the year.”
Soaring global debt
The other big catalyst for gold price is the soaring US and global debt. The latest data shows that the total US debt has jumped to over $35.1 trillion, which is equivalent to $268,258 per taxpayer.
At the same time, other countries have substantial amount of debt. China has over $14.5 trillion while Japan, Germany, and the UK have over $13.5 trillion, $3.38 trillion, and $3.8 trillion respectively.
Worse, global debt, led by the US is increasing, meaning that the situation could get worse soon. Therefore, many people believe that gold is a safe haven that will do well when the economy implodes.
However, historically, data shows that gold drops when other assets retreat. On Monday, it dropped by almost 4% as global assets retreated because of the unwinding of the Japanese yen carry trade.
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