To The Moon

Since the beginning of this year, gold prices have been on a consistent upward trend, repeatedly hitting record highs. Gold prices surpassed $2,700 per ounce for the first time, outperforming the broader market index with a year-to-date increase of over 30%, while the S&P 500 has only gained 22%. The heightened tension surrounding the U.S. election and the escalating geopolitical unrest in the Middle East have fueled the demand for gold as a safe-haven asset. A loose monetary policy environment and central bank gold purchases have also contributed to gold's shine.

The rise in gold prices is primarily driven by the following four factors:

1. Increased Safe-Haven Demand Due to U.S. Election Uncertainty

The upcoming U.S. election, marked by the intense competition between Kamala Harris and Donald Trump, has heightened market volatility, driving up gold prices. Gold is seen as a reserve of wealth by investors in times of political uncertainty.

2. Geopolitical Tensions Boost Safe-Haven Sentiment

The ongoing conflict between Israel and Hezbollah has sparked increased demand for gold as a safe-haven asset. Recent airstrikes and the rising number of casualties have added to market uncertainty, prompting investors to turn to gold to hedge against geopolitical risks. Historically, gold has been a means of preserving value during periods of financial and political instability, often performing well when other asset classes falter.

3. The Era of Loose Monetary Policy

Central banks worldwide, including the Federal Reserve and the European Central Bank (ECB), have been lowering interest rates in response to slowing economic growth.

Since July 2023, the Federal Reserve has kept interest rates at a 23-year high for 14 consecutive months. Last month, it initiated a 50-basis-point rate cut, marking the beginning of a new rate cycle—the first rate cut since 2020. The Fed is expected to cut rates by another 50 basis points at its final two meetings this year, in November and December. It also forecasts additional cuts of 100 basis points next year and 50 basis points in 2026, implying four rate cuts in 2025 and two in 2026.

At the same time, the ECB announced its third rate cut of the year, lowering its deposit rate by 25 basis points during its October meeting, driven by inflation risks easing faster than expected in the Eurozone.

Lower interest rates increase the appeal of gold relative to fixed-income assets like bonds. Notably, gold is highly sensitive to rising U.S. interest rates, as higher rates increase the opportunity cost of holding non-yielding gold.

4. The Surge in Central Bank Gold Purchases

Additionally, strong physical purchases by central banks have been a key pillar supporting gold prices. According to the World Gold Council, global central banks increased their gold reserves by 6% in the second quarter, adding 183 tons. However, purchases are expected to slow down in 2024. Notably, the People's Bank of China halted its gold purchases for the fifth consecutive month in September.

Recent Gold ETF Performance

Gold ETFs have benefited from this surge, with several prominent gold ETFs posting impressive recent performances:

• SPDR Gold Shares (GLD): As the largest gold ETF globally, GLD has an asset management scale of $75.3 billion and an expense ratio of 0.4%. It tracks the spot price of gold and has risen over 31% year-to-date.

• iShares Gold Trust (IAU): IAU is favored by investors for its lower expense ratio of 0.25%. With $32 billion in assets under management, it has also delivered a solid performance, with a year-to-date gain of over 31%.

• SPDR Gold MiniShares Trust (GLDM): GLDM, a low-cost version of GLD, has a lower expense ratio of 0.1% and an asset management scale of about $9.4 billion, making it suitable for long-term investors. Its price performance closely mirrors GLD, but with lower fees, making it an ideal choice for cost-sensitive investors seeking exposure to gold as a safe-haven asset. GLDM has also gained over 31% year-to-date.

Does Gold Have More Room to Rise?

Despite the substantial rally in gold prices, international institutions remain optimistic about its future prospects. At the annual London Bullion Market Association (LBMA) conference in Miami, representatives predicted that gold prices could rise to $2,941 per ounce over the next 12 months, suggesting a potential upside of nearly 10% from current levels.

Industry analysts point out that the recent surge in gold prices is mainly driven by the expectations surrounding the U.S. election and loose monetary policy. Additionally, the intensifying geopolitical tensions have prompted investors to seek safe-haven assets like gold amid rising concerns about global market instability.

Qiu Rui, an analyst from Orient Jincheng's Research and Development Department, notes that with U.S. inflation decreasing at a slower pace, rising expectations of U.S. debt expansion, and ongoing geopolitical tensions in the Middle East, safe-haven demand will continue to push gold prices higher, leaving room for further gains.

However, Zhou Maohua, a macro researcher at Everbright Bank's Financial Markets Department, cautions that while the Fed's rate-cut cycle may constrain short-term U.S. Treasury yields and the dollar's rise, reducing the opportunity cost of gold, the current rate environment is supportive for gold. Yet, he also warns that uncertainties remain around the Fed's easing policies, as well as the influence of safe-haven demand, global central bank gold purchases, and the future direction of the U.S. dollar.