The strong upward momentum in gold prices could lead to new highs of around $2,700 by December, supported by interest rate cuts from the US Federal Reserve beginning this week.

The metal rallied in 2024, driven by a weaker US dollar, ongoing geopolitical tensions, increased central bank interest and expected interest rate cuts.

Prices jumped to around $2,590 on Monday, up 3.8% from $2,494 just a week earlier, as the US Federal Reserve meeting approaches.

In a recent market note, ANZ's commodity strategists noted that bullish sentiment was fueled by weak US macroeconomic data, which boosted expectations that the Fed will begin its easing cycle with a 50 basis point rate cut at its upcoming meeting on 17-18 September.

As of Tuesday, markets were pricing in a 62 percent chance of a 50-basis-point cut, up from 30 percent the previous week, according to CME FedWatch, which forecasts interest rate moves based on futures trading data.

While the start of a rate cut in the US is expected to support gold prices, the intensity of its rise depends on the pace of rate cuts in the near term, ANZ strategists Sonny Kumari and Daniel Hines said.

“Falling real interest rates and a weaker US dollar are likely to strengthen the inverse relationship they have with gold during the upcoming easing cycle. This will boost investment demand as the opportunity cost of holding gold falls,” the pair said.

“We expect the recovery of strategic gold investments to push prices higher. Reduction by 100 b.p.t. could lead to net flows of 200-250 tonnes

Macroeconomic and geopolitical concerns, the U.S. election and likely increased volatility in equity markets also make a compelling case for increased gold investment, Kumari and Hines said.

According to their forecasts, gold prices will move towards US$2,700/oz in the short term and reach a peak of US$2,900/oz by the end of 2025.

Other factors contributing to the rise in gold prices include continued central bank purchases and strong demand for physical gold. India in particular is expected to boost consumption in the second half of the year as retailers stock up in anticipation of the festive and wedding season.

ETF flows are expected to increase

Looking at the popularity of gold in the ETF envelope, ANZ strategists explained that during each cycle of monetary policy easing, gold prices have historically seen a boost in ETF flows.

For example, during the global financial crisis, net ETF flows jumped from 1,400 tonnes in early 2009. to 2,500 tonnes by the end of 2012, coinciding with a 170 percent increase in gold prices since 2007. until 2012 Similarly, in the 2019–20 Fed interest rate -cutting cycle, net ETF flows reached 1,000 tonnes, with holdings peaking at 3,415 tonnes in November 2020, and gold prices rose 33 percent by the end of that year.

However, recent trends diverge from this model.

Despite gold prices rising more than 20 percent, ETF holdings peaked in late 2020. and then suffered a liquidation of nearly 913 tons. This recent rally in gold has been atypical, driven more by monetary tightening and strong equity markets than by positive ETF flows, strategists said.

“We believe ETF flows will return once the Fed's easing cycle begins. Flows have turned positive in recent months in all regions,” Kumari and Hines said.

If the Federal Reserve implements the expected 100 basis point rate cuts, ETF flows could increase by 200 to 250t, and a total of 200 basis points in cuts could potentially increase inflows by 500t, the pair noted.

However, they added that while strategic ETF investments could support a rise in gold prices, speculative positions appear stretched, with short positions nearly covered and long positions approaching 2020 levels.

"The crowded positions are likely to be a headwind for the price in the short term."