Gold’s appeal for investors does not appear to be diminishing. According to the World Gold Council, August marks the fourth consecutive month of inflows to gold ETFs. Meanwhile, Goldman Sachs anticipates strong continued demand amid record prices.   

Demand for the precious metal is not surprising ahead of ahead of expected Federal Reserve rate cuts. As rates decrease, interest in gold tends to grow. According to a recent Reuters poll, most economists believe that the Fed will cut rates by 25 basis points at each of the three remaining scheduled policy meetings this year. (Some analysts anticipate a larger cut of 50bps. However, with US core inflation higher than anticipated, the likelihood of a larger cut may be lower.)  

The dovish central bank mood occurs at a time of high deficits, with policymakers seemingly unwilling to cut spending. In this context, investors are arguably turning to gold as a hard asset in an inflationary environment. (Don’t miss our detailed analysis of ‘the 4D trade’ and the effect on gold prices.) 

Central bank buying 

As we recently discussed, central bank buying is an important factor in the gold market. Central banks are buying gold to diversify their reserves and in response to political risk. At the same time, however, central bank gold purchases can also affect the market, contributing to increasing gold prices. For a more detailed discussion, see our piece on the geopolitics of gold.  

Persistent geopolitical risk 

Rates are not the only thing driving interest in gold. The metal is seen as a safe haven during times of political risk. 

With tensions remaining high in the Middle East (not least concerns about the possibility of a direct Israel-Hezbollah conflict) and the ongoing war in Ukraine, geopolitical risk seems high. 

Indian import duties 

Keen gold watchers took note of India’s lower import duty for gold. The cut is significant in terms of local Indian demand as the cut on import duties lowered the price of the metal, even as the international gold price rose. 

That said, the price of gold in India is overall up this year in India According to the World Gold Council, “even with this recent decline, domestic gold prices have risen by 10% on a y-t-d basis.” 

Big picture, fine details 

Like any asset, the price of gold is driven by a complex set of interrelated factors. For insight, analysis and commentary on markets, macro and political economy, don’t miss the Overleveraged podcast, with Finalto’s Chief Market Analyst, Neil Wilson. It’s available wherever you listen to podcasts. Click here to find the latest episode.  

Simon Shear

Content Writer at Finalto

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