The price of spot gold is making a strong turnaround after hitting a fresh high in August. Traders are beginning to price in the possibility of the U.S. Federal Reserve lowering interest rates at their upcoming meeting in September.
On, August 23, Fed Chair Jerome Powell laid out his forward-looking plan during his keynote address at the central bank's annual retreat in Jackson Hole, Wyoming. Powell reiterated that the Federal Reserve continues to monitor incoming economic data to determine the possibility of future rate cuts.
However, what many traders took from Powell's keynote addresses was his saying that "the time has come for policy to adjust." Interest rates have been central to gold's recent bearish performance, seeing prices reach more than $2,514 on August 20, the highest closing price for the commodity to date.
By some estimates, the price of a 400 troy ounce (12.4 kg) standard gold bar is now worth more than $1.0 million following the strong price gains. Since then, headlines continue to surface that a new gold rush is imminent and that traders can expect gold prices to reach stratospheric levels in the coming months.
Uncertainty up ahead
The recent surge in gold prices reflects the ongoing uncertainty that many traders and investors are currently experiencing across the market. The wider economic outlook, specifically surrounding interest rates, and the possibility of the U.S. economy coming in for a hard landing have sent many to begin solidifying their positions in safe-haven commodities.
Equity markets started August on a lower note following weaker-than-expected earnings results. Not only did earnings disappoint investors, but many were surprised following the news that the U.S. labor market is beginning to show signs of cooling.
August's job report revealed that American employers added roughly 142,000 nonfarm payrolls, well below analysts' expected 160,000. Unemployment increased to 4.2%, which was a slight decline from the previous month's level of 4.3%.
At market close on August 5, the Dow Jones Industrial Average had lost around 2.6%, while the tech-heavy Nasdaq Composite was down 3.43%. The broader S&P 500 benchmark showed similar performance, sliding by 3% and registering its biggest daily loss since September 2022. Over in Japan, stock markets posted their worst drop since 1987, sending fears of a global recession.
Commodity markets witnessed similar blows, with the yellow metal falling 1.53% to $2404.58 per ounce, and silver sliding 4.63% to $27.25.
The market sell-off triggered by the possibility of a near-term recession had sent markets into a volatile state, which had since managed to recover, including the S&P and Nasdaq snapping an eight-day winning streak on August 22.
Markets remained volatile in the early days of September, with post-Labor Day trading with the S&P falling 2% on opening bell, and Japan's broad Topix share shrugged off 3.7% on September 4, registering its biggest drop since August 5, according to Reuters.
Heading into September
There's now a shared opinion among market experts that gold prices will remain elevated in the coming weeks, with some even suggesting that price performance could reach new highs following a possible rate cut in September.
Multinational investment bank UBS had recently raised its position on spot gold, saying that they expect prices to reach $2,600 before the end of the year.
Elsewhere, experts are suggesting similar trends, with some saying that large purchases of gold by central and mega banks will continue to drive up gold prices as they seek to hedge against looming uncertainty and the possibility of a recession.
Gold prices could be further raised on the back of higher demand for the precious metal. Gold demand has increased in specific sectors including technology and investment. The World Gold Council estimates that the electronics sector accounts for nearly 80% of the gold used in the technology market.
Unsurprisingly, demand for digital devices continues to outpace supply across the world as more companies are pushing to deliver more innovative devices that harness the use and application of artificial intelligence (AI).
Aside from this, traders have started factoring in the possible change gold prices can undergo in the wake of the U.S. elections. The upcoming November election could change the direction of economic recovery in the post-pandemic era, and perhaps the direction in which gold prices might be moving.
While some argue that prices may remain steady in the lead-up to the elections, the days and weeks following could present a series of new questionable outcomes and could push more traders to stock up on gold as a possible safe haven.
But gold prices could head in an opposite direction following the elections. A peaceful turnover of power could result in gold prices staying at their current levels, or slightly dip below its former peak.
Something that traders will need to factor into their calculations is how the incoming president will handle geopolitical conflict in the Middle East and the ongoing war between Russia and Ukraine.
The invasion of Ukraine by neighboring Russia in February 2022 had already sent gold prices skyrocketing, which at the time registered a 6% increase, which at the time was its biggest month-over-month increase since May 2021 to $1910 per ounce. The outbreak of war, including a stronger dollar, had increased market volatility, sending widespread uncertainty across the global market.
Final Thoughts
September looks to hold plenty of activity for the commodity market, and traders are beginning to gear themselves for major price swings as the Federal Reserve prepares to deliver a verdict on whether they will begin adjusting their monetary policy.
Though the recent increase in gold prices has sent traders scrambling, this could perhaps become the lead-up to something bigger in the coming weeks and months, as there are still plenty of important dates traders will need to pencil into their calendars.
Chart via TradingView.
Feature image is AI generated by ChatGPT
