Economist Diego Cacciapuoti from Oxford Economics forecasts that while the recent rally in gold prices may lose momentum, robust fundamentals will help maintain elevated prices into 2025 and beyond. In a recent analysis, Cacciapuoti acknowledged that gold’s price surge has exceeded their already optimistic predictions.
Cacciapuoti noted, “After anticipating price consolidation in December 2023, we have consistently highlighted gold’s upside potential due to its strong fundamentals. In early July, we reopened our long positions on gold prices.” He attributed the strong structural demand, particularly from emerging market central banks, including the People’s Bank of China (PBoC), as crucial factors supporting this favorable environment.
However, he warned that gold prices could face near-term consolidation. “This consolidation stems from the fact that the rally has been largely driven by declining real yields, which diminish the opportunity cost of holding non-yielding assets like gold,” he explained. Cacciapuoti pointed out that yields still play a critical role in influencing gold price movements, although the historically negative correlation has softened recently due to heightened safe-haven demand. Since real rates peaked in April, lower yields have continued to bolster gold prices.
In the first half of 2024, the negative correlation between real yields and gold prices paused as investors gravitated toward gold amid rising inflation concerns. “At that time, concerns about inflation becoming entrenched led investors to purchase gold for protection,” Cacciapuoti remarked. Additionally, Chinese consumers redirected their savings from underperforming property and equity markets toward gold investments.
He emphasized that these factors, combined with robust central bank purchases, have sustained gold prices and fueled the current rally, even as real yields have risen. However, as these influences fade, he anticipates that gold will revert to being influenced by real yields, with the historical negative correlation reestablishing itself to some extent.
Cacciapuoti expressed skepticism about the sustainability of recent declines in Treasury yields. He expects this support for gold prices to diminish temporarily, allowing for consolidation in the short term. “Markets overreacted last week by pricing in 50 basis points of Federal Reserve rate cuts for the November meeting. While we agree the Fed will cut rates in November, we believe it will proceed cautiously, limiting cuts to no more than 25 basis points, as the U.S. economy is likely on track for a soft landing,” he stated.
Consequently, Oxford Economics now anticipates increased pressure on gold prices and some profit-taking among investors. “Positioning is at a post-pandemic record high, but recent increases have been minimal despite significant price rallies,” Cacciapuoti noted, suggesting that speculative interest in bullion may be waning.
He predicts that as the rally shows signs of exhaustion, gold prices may consolidate around $2,500 per ounce, considerably lower than the aggressive current market pricing. Despite this expected pullback, Cacciapuoti remains strategically bullish, believing that once prices stabilize, the yellow metal will rebound. “Falling yields will continue to bolster ETF demand, which has been rising since May, shortly after real rates peaked,” he said.
Another critical factor for sustaining gold prices is ongoing sovereign purchases, particularly from countries like China, which Cacciapuoti believes will persist. “China, one of the largest recent buyers, still has ample room to diversify its reserves toward gold. Its gold holdings constitute a small percentage of its total reserve assets compared to other nations,” he explained. He added that with significant absolute reserves, even a 1% increase in official gold reserves could substantially impact gold prices.
As the week unfolds, spot gold has been experiencing volatility, recently completing a triple-top at $2,622 per ounce early Wednesday before dipping to a session low of $2,605.26. At the latest trading update, spot gold was priced at $2,615.01, reflecting a 0.27% decline on the daily chart.
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