The price of gold has reached unprecedented highs amid tensions in the Middle East and the risk of open war between Hezbollah and Israel, uncertainty over the US elections and concerns over debt and deficit budget of the United States. Additionally, the start of the Federal Reserve’s monetary easing cycle reduces its opportunity cost. In twelve months, we estimate that it could reach 2,650 per ounce.
Its demand outside organized markets has already soared in the second quarter, with a sharp increase in positions on American futures contracts. For its part, demand for exchange-traded funds, ETFs, has recovered after two years of disinvestment in this asset. At the same time, official demand has declined – notably from central banks and other institutions, such as sovereign wealth funds – precisely because of high prices. Even Chinese demand for physical gold has declined significantly in recent months.
The fact is that historically, the demand for gold outside of organized markets and ETFs has been fundamental to the gold trend. This demand should continue to favor gold as a low opportunity cost hedge.
Indeed, the demand for gold outside organized markets is speculative and could have been driven by political uncertainties and geopolitical concerns, the deterioration of the budgetary outlook and the US elections, the increasingly accommodative monetary policy of the Reserve federal government and the upward trend in gold. But in the near term, that demand could reverse, particularly as the Federal Reserve’s aggressive interest rate cuts are factored in. Overall, we see little reason for variations in this demand, at least until after the US elections in November.
In terms of ETF demand, the opportunity cost of holding the precious metal is key, given that it does not earn interest. This cost was reduced with the start of the Federal Reserve’s monetary easing cycle due to slowing economic dynamics in the United States. So it’s possible that demand for gold ETFs will pick up again, especially as they have disinvested in gold. According to Bloomberg, ETF gold holdings have reached their lowest level, surpassing 80 million ounces after peaks of more than 110 million mid-2020. Interestingly, data from the World Gold Council suggests that demand for gold ETFs weakened during recent bouts of financial market weakness in early August and early September. Even a sustained decline in the US stock market is not necessarily positive for gold in absolute terms.
Regarding the demand for physical gold, high prices for the yellow metal tend to reduce it. This could explain the recent, although slight, drop in official demand this summer from central banks, interested in accumulating it to strengthen their foreign exchange reserves, according to the International Monetary Fund. Regardless, the risk of this decline continuing is limited, given that there have been no significant sales and demands from the Polish central bank – which forecasts that 20% of its reserves are in gold – as well as from structural buyers. remains, like India and Turkey, more insensitive to their prices. Data from the World Gold Council suggests that official demand could be around 900 tonnes in 2024, slightly lower than 2022-2023, but well above the average of 500 tonnes per year in the 2010s. Regardless, demand for physical gold from Asian countries is key to our positive view of gold. This demand could be strong in the coming months, particularly from India, where the gold import tax was lowered from 15% to 6% at the end of July.
What is more worrying is the decline in demand for physical gold from China.. This could be partly due to high gold prices, but also to weak domestic consumption. In addition, seasonal factors must be taken into account that make gold demand in China negative in summer. Even concerns about the weak renminbi have eased with the global reduction in interest rates, contributing to a decline in demand for safe-haven gold. Either way, Chinese demand for gold could increase depending on the outcome of the US elections in November.even more so if there is a new Trump administration that imposes high tariffs on imports of Chinese products.
