Gold prices held above $4,400 per ounce on Friday, August 14, supported by a series of U.S. economic data releases this week that signaled cooling inflation and demand, leading markets to significantly reduce bets on a Federal Reserve rate hike in September. This bolstered the appeal of the non-yielding asset. COMEX December gold futures opened at $4,408.20 per ounce, down about 0.3% from Thursday's close, before quickly recovering. As of 7:54 a.m. Eastern Time, gold rebounded to $4,419.60 per ounce; by 9:54 a.m., futures had risen further to $4,441.60, up $21.20, or approximately 0.48% for the day.
Since the start of the month, gold has accumulated gains exceeding 10%, indicating strong investor interest amid the repricing of Federal Reserve policy expectations and shifting outlooks for the U.S. dollar and real interest rates.
Fed September Expectations Shift: Probability of No Move Rises to Nearly 70%
A key driver of this gold rally is a notable change in market expectations for the Fed's next policy move. The CME FedWatch tool shows that the implied probability of the Fed holding rates steady in September is about 69.4%, while the probability of a hike has dropped to around 30.6%. This marks a significant shift from a month ago, when the chance of no move was only about 42%, and the expectation for a 25-basis-point hike once stood at roughly 50%.
This change is closely tied to this week's cooling U.S. economic data. The previously released Consumer Price Index (CPI) was moderate, the Producer Price Index (PPI) showed no clear reflationary pressures, and Friday's July retail sales figures posted a month-over-month decline of 0.6%, far below the market's expected 0.1% increase. These data points further reduce the necessity for the Fed to tighten monetary policy in the near term. For gold, this shift is particularly crucial. As gold generates no interest, when the market perceives a diminishing chance of further rate hikes, the opportunity cost of holding gold decreases, typically enhancing the relative appeal of the precious metal.
Gold's Monthly Gain Exceeds 10%, Long-Term Performance Remains Strong
In terms of price performance, gold's recent rally is quite pronounced. As of Friday, December gold futures were up about 3.1% from a week ago, about 10.3% from a month ago, and have accumulated a gain of approximately 31.7% over the past year. This suggests that, even with gold at historically high levels, funds have not shown significant signs of withdrawal.
It is worth noting that the macro environment for gold is not uniformly bullish. On one hand, cooling U.S. inflation and consumer data are lowering rate hike expectations. On the other hand, geopolitical tensions in the Middle East and rising crude oil prices could fuel future inflation risks and limit further declines in U.S. Treasury yields. On Friday morning, spot gold was supported by weak retail sales data, but rising oil prices constrained further gains for the precious metal to some extent. Therefore, gold is currently navigating between two forces: support from weakening economic data and declining rate hike expectations, and resistance from energy prices and potential reflation risks.
As Gold Rises, Wall Street Debates the Optimal Allocation
With gold prices hitting new highs, a pressing question for investors is becoming more prominent: after such a significant rally, what proportion should gold occupy in a portfolio? Market views on this are clearly divided. Robert R. Johnson, a professor at Creighton University's Heider College of Business, takes a cautious stance on gold. He argues that while a small allocation to precious metals might reduce portfolio volatility in the short term, sacrificing long-term returns for lower volatility may not be worthwhile, especially for younger investors with longer investment horizons.
Brett Elliott, Director of Content and SEO at APMEX, believes that the appropriate gold allocation should depend on investment goals. For growth-oriented investors, a 10% to 15% allocation might still be acceptable. For income-focused investors, given that gold does not generate interest or dividends, the position should generally be lower. He suggests that for many investors, a 2% to 5% gold allocation can provide some portfolio resilience without significantly dragging down long-term return potential.
Blake McLaughlin, Executive Vice President at Axcap Ventures, is relatively more positive, arguing that historical performance supports investors allocating about 5% to 8% of their assets to gold. In his view, while gold may not offer the high return potential of some riskier assets, its resilience during periods of economic uncertainty and geopolitical turmoil makes it increasingly difficult to ignore in a portfolio.
From 5% to 20%: The Growing Divide on Gold Allocation
Thomas Winmill, Portfolio Manager at Midas Funds, believes that holding roughly 5% to 15% in gold may be more reasonable for most investors, and he prefers gaining gold exposure through funds focused on gold mining companies. In his view, there is no one-size-fits-all number for gold allocation. An investor's risk tolerance, asset structure, and the ratio between financial assets and hard assets should all be considered. If a person's wealth is already heavily concentrated in financial assets like stocks and bonds, increasing the gold position could help enhance diversification. Conversely, if real assets like real estate already account for a high proportion, the demand for gold may be relatively lower.
Vince Stanzione, CEO and Founder of First Information, holds a significantly more aggressive view. He believes the gold allocation could reach 20% and prefers holding physical gold or gold ETFs. He argues that in an environment of long-term declining purchasing power of currency, gold can serve as a wealth protector and hedge. The wide divergence in institutional views, ranging from no recommendation at all, to 2% to 5%, 5% to 15%, and up to 20%, itself indicates that with gold above $4,400, the market has shifted from "whether to buy gold" to another question: "exactly how much gold should be in a portfolio?"
Gold's Next Step Still Depends on the Fed
For gold's future trajectory, the core variable that will truly determine whether this rally can continue remains the Federal Reserve. If employment, consumption, and inflation data released in the coming weeks continue to show a moderate cooling of the U.S. economy, market expectations for the Fed to hold steady in September may strengthen further, potentially providing continued support for gold from the interest rate side. Conversely, if energy prices continue to climb and reignite inflation expectations, U.S. Treasury yields could remain high, thus limiting gold's further upside.
Currently, the Fed's September 15-16 meeting remains one of the most important policy events for the market. With the probability of a rate hike falling from about 50% a month ago to around 30% now, the market has already undergone a significant policy repricing. For gold investors, the $4,400 per ounce level is not just a price threshold; it is also becoming a critical test of the strength of this gold bull market. Going forward, whether the U.S. economy continues on a "soft landing" path or faces renewed inflationary pressures will determine whether gold can expand its monthly gain of over 10% further.
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