Gold prices extended their strong rally on Thursday, building on the largest single-day gain in six months. Market sentiment was buoyed by progress in talks between Iran and Oman regarding shipping arrangements in the Strait of Hormuz, which could ease energy supply risks and reduce pressure on the Federal Reserve to tighten monetary policy further due to high oil prices.
Spot gold rose as much as 1.3% on Thursday, briefly breaking above the $4,300 per ounce mark. The previous trading session saw a 4.1% surge, the biggest one-day jump since February 3. A key driver of the rally was the easing of tensions in the Strait of Hormuz. Iran stated it had reached an agreement with Oman on proposed shipping routes through the strait, leading markets to anticipate the potential resumption of some energy supplies through this vital global transit chokepoint, which in turn pushed international oil prices lower. This followed earlier indications from former U.S. President Trump that a deal could be reached as early as Wednesday.
Where the opportunity lies
Market expectations for the Federal Reserve's future policy path have shifted. Investors have now fully priced in only one rate cut from the Fed this year, a sharp contrast to last week when two cuts were anticipated. The probability of a rate cut in September has fallen from 67% two days ago to 55%. For non-yielding precious metals like gold, a reduction in the pressure from rising interest rates typically provides support.
Analysts at TD Securities, including Ryan McKay, noted in a report, "Macro headwinds have been pushed further out on the horizon, and combined with hopes for a U.S.-Iran deal, this has injected strong momentum into precious metals." The team reported that macro-strategy funds have more than doubled their gold holdings since June. Additionally, large funds on the Shanghai Futures Exchange and inflows into Asian gold ETFs are also providing support for prices.
In recent weeks, Chinese institutional investors have been actively buying gold, helping to stem the precious metal's decline and keeping prices above the key $4,000 per ounce level. According to Bloomberg calculations, as of Monday, Chinese gold ETFs have recorded inflows for 14 consecutive days, the longest streak since March. This indicates a shift in sentiment in the world's largest gold market, following prolonged outflows and price drops due to the Middle East conflict.
"Institutional investor interest has increased since gold prices fell to around $4,000," said Steve Zhou, an analyst at HuaAn Fund Management, which operates China's largest gold ETF. The physical market is also showing signs of strength. The Shanghai Gold Exchange price is trading at a slight premium to the London global benchmark, implying lower costs for banks sourcing metal overseas. Furthermore, gold's breakout above key technical levels has spurred additional buying.
Why the $5,000 target is back on the table
Nicky Shiels, head of metals strategy at MKS PAMP, stated that gold's rally has gathered strong momentum after breaking through key technical levels, catching up with platinum, which experienced a similar breakout the previous day. She noted that investors typically buy gold and other assets when they anticipate a weaker U.S. dollar or rising inflation ahead of the Fed's September meeting. She added that after a strong rebound earlier this year, gold had been mostly range-bound for the past few weeks, leaving room for prices to move higher again.
Tony Sycamore, an IG market analyst, suggested that a sustained break above the 200-day moving average could pave the way for a stronger recovery towards the $5,000 mark. However, TD Securities analysts cautioned that risks to the gold rally remain. "The still extremely tight energy market will remain a major obstacle to a renewed gold bull market," they said.
Investors are also awaiting the release of the July U.S. non-farm payrolls report on Friday. The ADP employment report released overnight showed that U.S. private sector job growth slowed in July. Joshua Rotbart, founder of J. Rotbart & Co, said that weak employment data would provide further support for gold, while strong data could exert short-term pressure on prices as markets reassess the monetary policy timeline.
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