5 min readGold prices have risen to a record high this week, above $3670, as the precious metal trades up over 5% this month and 38% this year.
The precious metal has outperformed other assets, including US stocks; the S&P 500 is up 11% year to date, although the index trades at record highs, and Bitcoin, which is also up 12% this year but trades some 10% below its record high.
Why is Gold rising?
Gold has risen to a new record level on expectations of lower interest rates, a weaker USD, and amid safe haven demand as geopolitical tensions escalate.
The market is fully pricing in a rate cut at the FOMC meeting next week. According to the Fed funds, the market is pricing in a 92% chance of a 25 basis point rate reduction and an 8% chance of a 50 basis point cut.
Weak non-farm payrolls, combined with a 911k downward revision to total payrolls for the year through March, fueled rate cut expectations. Cooler-than-forecast PPI inflation cemented bets that the Fed will reduce rates next week. US PPI fell in August on a monthly basis for the first time since April.
Attention today is on US CPI data, which is expected to show that inflation rose to 2.9% YoY, up from 2.7%. Cooler than forecast inflation could add to expectations for a 50 basis point cut on September 17 or lift rate cut expectations across the year. The market is pricing in 66 basis points worth of cuts.
Like Bitcoin, non-yielding Gold performs better in low-interest-rate environments amid a lower opportunity cost of holding.
Rising rate cut expectations have also weighed on the USD, which fell to a 7-week low this week and only trades marginally up from levels last seen in 2021. A weaker USD lifts the price of USD-denominated Gold and Bitcoin.
Finally, geopolitical tensions are elevated, which is also underpinning the safe-haven with Israeli strikes in Qatar and Russia’s drone incursions in Poland. Bitcoin can also act as a safe haven over the longer term.
Where next for Gold?
With the Fed rate cut fully priced in, it would take a significant miss in CPI data (which is unlikely) to fuel a 50 bps rate cut. Therefore, it could become harder for the Gold rally to sustain its momentum without a fresh catalyst. While Gold also overstretched on multiple time frames, unless something changes on the macro front, any weakness is unlikely to be exploited. With central banks still buying Gold, albeit at a slower pace, there are few bearish drivers for now. That said, Gold’s minimal move following yesterday’s PPI data and its overbought conditions on multiple time frames suggests that the upside could be done for now.
Do stronger Gold prices bode well for Bitcoin?
Bitcoin’s strong volume-to-market-cap ratio of 1.29% and declining volatility are attracting institutional attention, helping to drive the digital gold narrative.
Gold’s rally could bode well for BTC, given that the cryptocurrency often tracks the precious metal and M2 supply with a lag of around 90 days. This could be setting BTC up for outperformance in Q4. Furthermore, the pause in Gold’s rally means a rotation of capital into BTC could be underway. At the time of writing, BTC has broken out above the key 113k resistance, bringing 120k back into focus.
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