By Bibhuti Dash in Bhubaneswar, Oct0ober 3, 2024: The price of gold has soared to new heights this year. It has increased more than 20% and on a strong upward trajectory. In the Indian market, gold recently traded at a peak of Rs 77,440 per 10 grams, while in the US, Comex gold hit a high of $2,694.90 per ounce on Wednesday night. This sharp rally in precious metals, especially since August 2024, can be attributed to five significant factors for gold’s impressive surge.

US Rate Cut

The market has been anticipating a rate cut in the US since the beginning of the year, and the Fed meeting this month had the highest expectations for such a move. The main question was the extent of the cut, with market participants debating between 25 basis points (bps) or a 50 bps reduction. Gold prices began their rally even before the rate cut was officially announced.

A lower interest rate reduces the opportunity cost of holding gold, a zero-yield investment, making it more attractive. The market views this rate cut as the start of a new easing cycle that could extend over several quarters, with futures traders already pricing in a total of 75 basis points in cuts by the end of 2024.

Analysts are now projecting a medium- to long-term target of $3,000 per ounce for gold, while in the Indian market, short-term targets of Rs 78,000 and medium-term targets of Rs 80,000 per 10 grams are increasingly being considered plausible.

Rising Conflicts

Prolonged conflicts on two continents are pushing investors toward the safety of gold. The escalation of hostilities in West Asia and the intensification of attacks between Russia and Ukraine have fuelled sustained investment in this traditional safe haven.

Recent developments include Israel targeting Hezbollah positions in southern Lebanon, with ongoing military pressure. Tensions have further heightened as Hezbollah urged Iran to launch an attack against Israel, raising fears of a broader Middle Eastern conflict. This potential for an all-out war, especially with a high likelihood of Iran’s involvement, has triggered a significant “flight to safety” rally.

Bob Haberkorn, Senior Market Strategist at RJO Futures, stated, “The current spike is being driven by a flight to safety on West Asia concerns; there’s going to be some renewed possible action by Iran… I think we’ll continue to make another new set of highs.”

Meanwhile, Peter McGuire, CEO of XM Australia, predicts that gold could reach $2,700 per ounce by the end of September and $3,000 per ounce by the end of 2024. He also suggests that China’s anticipated stimulus measures could further fuel gold’s upward momentum.

Physical Gold Demand

Despite rising gold prices, demand for physical gold in India continues to grow, especially with the onset of the festive and wedding season. The rural demand for gold shows encouraging signs of recovery, driven by an improved monsoon and increased crop sowing, which are expected to boost purchasing power, according to the World Gold Council.

India’s gold demand surged after the government announced a cut in import duties and discontinued its Sovereign Gold Bond Scheme, prompting more interest in heavier jewellery pieces. The festive season started on a strong note and is expected to gain further momentum, extending into the end of the year with the wedding season providing an additional boost.

In August, India imported a record $10.1 billion worth of gold (about 140 tons), marking a threefold increase compared to the previous month and double the value from a year earlier. This import surge is mainly attributed to reduced import duties ahead of the festive season. From January to August, gold imports rose 30 percent year-on-year, reaching $32 billion.

The World Gold Council’s Q2 2024 Gold Demand Trends report indicates that global gold demand rose four percent year-on-year to 1,258 tons, making it the strongest second quarter on record in their data series. This increase was largely driven by a robust over-the-counter (OTC) buying, which surged by 53 percent year-on-years to 329 tons.

Louise Street, Senior Markets Analyst at the World Gold Council, highlighted that the OTC market has witnessed a sustained interest in gold from institutional investors, high-net-worth individuals, and family offices, as they seek gold for portfolio diversification.

Investment Demand

In addition to physical demand, digital demand for gold has surged, particularly in India. Indian gold exchange-traded funds (ETFs) saw increased investment following the government’s reduction of import duty and adjustments to the long-term capital gains tax for gold ETFs in the Union Budget.

According to data from the Association of Mutual Funds in India (AMFI), a record investment of Rs 2,100 crore was made in August, significantly higher than the average monthly inflow of Rs 800 crore during the first half of 2024.

By the end of August, the assets under management (AUM) of Indian gold ETFs reached Rs 37,400 crore, marking a 54 percent year-on-year increase. Inflows for 2024 have been exceptional, totalling Rs 6,100 crore compared to Rs 1,500 crore during the same period last year, making it the best year for gold ETFs so far.

Globally, physically-backed Gold ETFs are witnessing resurgence after experiencing a decline earlier this year. While global gold investment saw a slight increase, reaching 254 tons, the demand from the Asian market played a crucial role in sustaining overall investment levels, even as investors in European and North American markets withdrew.

Central Banks

The Reserve Bank of India (RBI) has continued its gold-buying spree, adding 10.3 tons of gold over the six weeks leading up to the first week of September. This brings total purchases for 2024 to 50 tons, surpassing the net gold acquisitions made in both 2022 and 2023, positioning the RBI among the top central banks adding gold to their reserves.

RBI’s gold reserves now stand at a record 853.6 tons, accounting for 9 percent of its total foreign reserves, up from 7.5 percent a year ago.

Globally, central bank gold buying slowed slightly in the second quarter but still led to record purchases in the first half of 2024. Central banks added 483 tons in the first six months, which is 5 percent above the previous record of 460 tons in H1 2023. The People’s Bank of China’s reduced purchases contributed to this slowdown, as official reports indicated no additions to its gold reserves in May or June and only a 2-tonne increase in April.

Nonetheless, the World Gold Council’s annual central bank survey indicates that reserve managers expect gold allocations to continue rising over the next 12 months, driven by the need for portfolio protection and diversification amid a complex economic and geopolitical landscape.

Analysts anticipate that physical and digital demand for gold will continue to drive higher prices in the medium term. Geopolitical uncertainties ahead of the US elections, coupled with declining interest rates, are expected to further support the bullish outlook for gold in the near future.