What Next For Gold?

By Sachin Patel, Executive Director, Metal Products, CME Group

Gold price is influenced by factors like dollar strength, potential recession, inflation, and the future trajectory of interest rates.
For most of the year, gold and equities maintained their correlation, with gold notably outperforming during the onset of the U.S. banking crisis.

Gold has experienced significant volatility recently. In March 2022, the start of the Russia-Ukraine conflict saw the gold prices jump to a high of $2,069 before a steady selloff brought prices down to nearly $1,600 in September 2022. In March 2023, following the collapse of Silicon Valley Bank in the U.S., gold rebounded robustly, breaking the $2,000 threshold to register a new high, before shedding some of its lustre. The yellow metal currently faces an array of tailwinds that could potentially propel its price upward, counterbalanced by headwinds that could exert downward pressure.

Safe Haven Asset

Gold’s traditional status as a safe haven asset contributed to its price breaching the $2,000 barrier several times during the early part of the year. The collapse of Silicon Valley Bank and the forced takeover of Credit Suisse by UBS led to investors piling into gold in search of stability. However, a combination of rising yields, a stronger dollar, and persistently hawkish sentiment from central banks resulted in a subsequent price drop. Meanwhile, ongoing geopolitical tensions and concerns that the United States might enter a recession in 2023 have helped support the price of gold, keeping it above the $1,900 level.

Optimism surrounding the lifting of COVID-19 restrictions in China, the world’s largest gold market, at the start of 2023 provided an additional boost for gold. The anticipated post-COVID recovery and resurgence of consumer confidence ignited pent-up demand for gold. However, the rally was brief as concern mounted over the outlook for China’s economy and a potential debt market crisis.

More recently, signs that inflation in the U.S. is moderating have been bolstering gold as it tempers interest rate expectations going forward, making the metal more attractive to investors.

Headwinds Persist

Despite these supportive factors, the price of gold still faces several challenges. Though the strength of the U.S. dollar has retreated from the peaks seen in the second half of 2022, it remains robust by recent historic standards. A strong dollar is detrimental for gold as it makes purchases outside the U.S. more expensive. The metal’s price, denominated in U.S. dollars, can impact foreign demand, leading to a potential drop in gold prices when the dollar is strong.

The future trajectory for the dollar remains uncertain, with much depending on whether the U.S. economy enters a recession, the pace at which inflation decreases, and the future path of interest rates.

Interest Rate Impact

Interest rates typically exhibit an inverse relationship with gold prices. With high rates, and in some cases still rising, bonds and fixed income investments are an attractive alternative to gold. But an end to the current rate hiking cycle could positively impact the price of gold.

In July, the Federal Reserve resumed its interest rate hikes, with Chair Jerome Powell not ruling out the possibility of further increases, contingent on economic data assessed on a meeting-to-meeting basis. Following this announcement, the market was placing the highest probability on rates to remain unchanged for the rest of the year.

The Fed faces a tough balancing act, tasked with curbing inflation on the one hand while mitigating the impact of high interest rates on the economy on the other. Although the threat of a recession seems to be receding, the Fed may still have to quickly pivot its monetary policy to support growth.

The last time the Fed dramatically changed its course was in May 2019, signalling the start of the last gold bull run. Investors flocked to gold in response to lower fixed interest yields and a weaker U.S. dollar. A similar situation might arise if the recent rate hikes need to be swiftly reversed to support the economy amid waning consumer and business confidence.

Demand Weakens

On the demand front, 2022 was the strongest year for gold consumption in over a decade, according to the World Gold Council. Consumption of the yellow metal rose 18% to 4,741 tonnes, driven by a 10% increase in purchases by investors and robust purchases by central banks looking to promote stability.

But this trend reversed in 2023, with demand for gold during the first quarter falling by 13% year-on-year. Ongoing purchases by central banks and a surge in buying by Chinese consumers following the lifting of Covid restrictions were insufficient to compensate for lower investor demand and weakness in India, where high gold prices dented consumers’ appetite for the yellow metal.

The use of gold in technology also continued to trend downwards. Global economic headwinds dampened consumers’ appetite for electronic goods, causing gold consumption in this sector to plunge to its second-lowest quarterly level since the World Gold Council began its data series in 2000. At the same time, jewelry consumption remained stagnant.

Meanwhile, the total supply of gold marginally increased in the first quarter to 1,174 tonnes, buoyed by a 2% rise in mine production and a 5% rise in recycling spurred by higher gold prices.

Uncertain Price Trajectory

Looking ahead, the outlook for gold remains delicately poised. The price rose by 5.4% in the first half of the year. An end to the Fed’s rate-tightening cycle and a correspondingly weaker U.S. dollar could bolster gold. An economic downturn would also push the price higher due to its impact on investors’ risk tolerance. However, if the U.S. and global economies continue to display resilience, interest rates rise further, or the U.S. manages to avert a recession, the gold price could take a hit.

LOOKING AHEAD, THE OUTLOOK FOR GOLD REMAINS DELICATELY POISED. THE PRICE ROSE BY 5.4% IN THE FIRST HALF OF THE YEAR.

The correlation between gold and the U.S. equity market is another critical factor. Generally, the long-term correlation is positive. However, the two can decouple during periods of heightened stress and volatility. This year, gold and equities have responded similarly to shifts in dollar strength and yields. Nonetheless, gold did outshine equities during the onset of the U.S. banking crisis in March as its safe haven appeal was accentuated.

CME Group Gold Futures And Options Can Be Used To Manage Price Risks

Given the delicate balance of the outlook for gold, gold futures and options allow investors to mitigate the risk of price fluctuations. CME Group’s COMEX Gold suite of derivatives displayed robust performance in the first half of 2023, with volumes across our key products demonstrating substantial year-on-year growth. Here are some highlights of the average daily volume (ADV) growth year-on-year for our key products:

COMEX 100 oz Gold futures (GC): 6.2%
COMEX 100 oz Gold options (monthly expiry): 19%
COMEX 100 oz Gold options (weekly expiries): 33%
COMEX 10 oz Micro Gold futures (MGC): 33%

CME Group provides clients with round the clock liquidity on our global benchmark gold products, with market access provided 23 hours per day, 5 days per week. The Asia-Pacific region has become increasingly important over the years for the overall gold business at CME Group, with customers in the region regularly contributing up to 25% of the total day’s volume.

In terms of recent trends that we have seen in our markets, a standout feature has been the growth of our weekly options suite. CME Group now offers gold options that expire every Monday, Wednesday, and Friday. Customers can use these options to manage specific event risks in the market, which can impact gold prices (e.g., FOMC decision, Non-Farm Payroll). Their popularity is evidenced by their share of overall gold options volumes at CME Group; year-to-date, it stands at above 20%, compared to just 4% in 2018.

For any questions related to CME Group’s gold futures and options products, please feel free to reach out to sachin.patel@cmegroup.com.

Disclaimer

The opinions and statements contained in the commentary do not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.

CME Group does not represent that any material or information contained herein is appropriate for use or permitted in any jurisdiction or country where such use or distribution would be contrary to any applicable law or regulation.

SACHIN PATEL is the Executive Director, Metal Products, Asia Pacific at CME Group, based in Singapore. He is responsible for expanding CME Group’s metal business and developing new opportunities across the region. Prior to joining CME Group in September 2017, Patel spent 10 years in Bank of America Merrill Lynch’s Global Commodities division, where he covered numerous roles across trading, structuring, as well as sales in metals, exotic options and commodity index products.