What next for the price of gold

By Kathleen Brooks

How long will the gold rally last?

The gold price made another record high on Monday after it breached the key $2,700 level on Friday. The bullion price is now just over $260 away from $3,000 per ounce. But why is the gold price higher by more than 17% in the last 6 months, at the same time as the price of Brent crude oil is lower by 17%?

Fundamentals support the gold price

Demand for gold has never been higher. The World Gold Council reported that demand for gold reached a record high in Q2, and after further price increases, we can assume that demand remained robust in Q3. But will there come a time when even central banks think the price of gold is too high, and high prices start to erode demand? Due to the parabolic rise in the price of gold, this cannot be discounted as a possibility.

At the same time, gold is considered the ultimate inflation hedge, and part of the reason for gold’s push higher is that investors see more inflation risks on the horizon. For example, US growth is expanding just as the Federal Reserve has cut interest rates by 50 basis points and is expected to cut rates another five times by the middle of next year. Also, the Chinese government has expanded its stimulus plan to try and boost its economy.

There are also political risks that are fueling the rise in the gold price. Donald Trump is rapidly catching up with Kamala Harris in the polls ahead of next month’s US Presidential election. According to the non-partisan Committee for a Responsible Federal Budget, Trump’s economic plans could add $7.5 trillion to the national debt. This compares with $3.5 trillion for Kamala Harris. Thus, the prospect of a massive fiscal expansion in the US is adding to inflation fears and to concerns about the sustainability of US debt.

Gold thrives in an uncertain environment. The US election is far too close to call at this late stage and tensions remain elevated in the Middle East, with the prospect of Israel striking Iran still a possibility. As long as the macro and geopolitical environments remain sensitive, then the gold price could rally.

The risks to the gold price

However, what goes up, usually comes down. So, what are the risks for the gold price? The first risk is an outright win for Kamala Harris at next month’s US Presidential election. If she can beat Donald Trump then it may act as a check on the rising deficits, which could lead to a reversal in the gold price.

Also, the gold vs. the 10-year Treasury bond price ratio is at a record high. This means that Treasuries are exceptionally cheap compared to gold right now, as you can see in the chart below. This is interesting, since it also suggests that the bond market and US Treasuries are not pricing in US inflation risks, yet the gold price is.  

This ratio is stretched to the upside, and due to this it could be ripe for a reversal at some stage. Either bond prices will rise (bond yields will fall), or the gold price will decline due to reduced fears about inflation and unsustainable US fiscal deficits. For the gold price to decline we may need to see a sharper decline in US inflation, with monthly CPI rates more in line with Europe and the UK, a continued disappointment in Chinese fiscal stimulus, and a win for Harris in the November US Presidential election.

Chart 1: Gold/ 10-year Treasury Note price

Why has the oil price not followed gold higher?

Commodity markets have not been moving in unison in 2024. The gold price has surged while the oil price has tanked in recent months. The price of oil is not benefitting from fears about inflation, the pickup in US growth expectations or from Chinese stimulus measures. Added to this, although tensions remain elevated in the Middle East, this has not boosted the oil price.

Although the oil price is in recovery mode on Monday, the outlook remains challenging. Forecasts for oil consumption next year remain weak. The IEA cut its forecast for oil consumption in 2025 last week, Opec and the EIA also expect demand to fall next year. Thus, any recovery in the oil price could be short lived as the fundamentals for the oil price remain weak.

Will the oil price weigh on gold?

If the oil price is hindered by weak demand, then it could limit the upside potential for global headline inflation. Could this erode demand for gold as an inflation hedge? The oil and the gold price have no correlation of note, which means that they do not move together. However, as you can see in the chart below, there have been periods in the last 5 years when the gold price and the oil price move in opposite directions. This does not seem to last indefinitely. If history repeats itself, then one can assume that the difference between the oil and the gold price will narrow, however, it is hard to pinpoint when this will happen. With gold at a record high, it remains vulnerable to a sell off, which could be triggered by weaker inflation data in the US, or a victory for Kamala Harris at next month’s election.

Chart 2: The gold price in USD and Brent crude oil