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Could gold break out of its four-month consolidation?

A pile of gold bars.

The World Gold Council (WGC) mid-year report highlighted the following key points:

  • The current gold price reflects market expectations for the second half of 2024, but it – and the wider economy – are awaiting a catalyst
  • Bullish catalysts for gold include falling interest rates, as well as demand for “safe havens” due to asset bubbles and geopolitical tensions
  • The price of gold is at risk from reduced demand from central banks and profit-taking by Asian investors

As the report points out, the price of gold has been consolidating in recent weeks, between historical highs around $2,432 and $2,450 and at lows around $2,276. This has surprised some traders, with gold having been one of the best-performing assets so far this year.

This stabilisation has reduced overbought conditions without impacting the overall bullish trend, which may be supported by stock market bubbles and high levels of debt.

Interest rates and asset price bubbles

The WGC and the market are likely to be wondering if there are more catalysts for further gains.

Interest rate cuts, highlighted by the WGC as a bullish catalyst, are already widely anticipated. For instance, the market expects the US Federal Reserve to cut US rates by 50 basis points to 5% in 2024, before further cuts down to 4% by September 2025. These cuts could support economic growth and stability – the “Goldilocks” scenario, which could negatively impact gold prices if it materialises.

However, a sharper drop in interest rates due to economic deterioration would be favourable for gold, removing the Goldilocks outlook and increasing the risk of asset price corrections, as noted in the Fed's latest Financial Stability Report.

Geopolitics and central banks

Geopolitical tension, as measured by mentions of acts of war or terrorism in the Geopolitical Risk Index (GPR), has long since lost correlation with the price of gold. The GPR has been falling steadily over the past two years, while the price of gold has risen by more than 30% over that period.

Current geopolitical tensions could be better represented by the BlackRock Geopolitical Risk Index (BGRI), which highlights the following risks: 

  • Conflict between the US and China
  • Global technological decoupling
  • Conflict between Russia and NATO
  • Tension in the Middle East
  • Terrorist attacks and cyberattacks

Most of these components are related, and point to a world of two halves, with the US leading the West and China the East. The latter half is questioning the hegemony of the US dollar, and US bonds are gradually being sold as central banks replace their dollar reserves with gold. If geopolitical tensions do not diminish, central banks in emerging countries – the main buyers of gold – are unlikely to take profits or reduce their buying appetite.