Gold hovered around setting a new all-time high this week, bolstered by US consumer data which has indicated weakness in the economy and made the case for deeper interest rate cuts in the coming months.
Spot gold stayed flat at USD$2,655.79 per ounce by mid day on Wednesday, having retracted from a new record of USD$2,669.97 set in earlier trading. US gold futures gained roughly 0.1 per cent at $2,679.10 per ounce.
A report released on Tuesday revealed that US consumer confidence fell this month by the largest margin in three years, prompting traders to increase their bets on more aggressive rate cuts from the Federal Reserve this year.
Following the report, commodity analysts at BMO Capital Markets revised their gold price outlook, forecasting an average of USD$2,700 per ounce in the fourth quarter—an increase of 15 per cent from the bank’s previous estimate of USD$2,350.
UBS Group AG also raised its forecast, predicting the same average price by mid-2025. Bullion has surged nearly 30 per cent so far this year, with the rallies gaining momentum after the Fed’s half-point cut last week. Strong central bank purchases and heightened geopolitical tensions have further supported demand for gold as a haven asset.
Investors have traditionally viewed gold as a haven against runaway inflation. This year, it has climbed roughly 30 per cent, outperforming the benchmark S&P 500 index’s 20 per cent gain. Central banks in countries such as China, Turkey, and India have helped drive this increase by adding to their gold reserves to diversify away from the US dollar.
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Americans are increasingly pessimistic about economy
Federal Reserve Chair Jerome Powell stated at the central bank’s post-meeting press conference last week that the significant half-point interest rate cut aimed to preempt further labour market weakness.
Some economists have noted that despite the rate reduction, the economy remains uncertain, highlighting that once the unemployment rate begins to rise, it is difficult to slow. In August, the unemployment rate stood at 4.2 per cent, still low by historical standards but up from 3.8 per cent a year earlier.
On Tuesday, fresh consumer confidence data showed that Americans are increasingly pessimistic about the US economy and the job market’s future. The conference board’s monthly confidence index dropped to 98.7 in September, lower than expected, down from August’s upwardly revised 105.6.
JPMorgan Chase researchers said in a note on Monday that they expect the yellow metal to continue its rise toward their 2025 target price of USD$2,850 per ounce as the Federal Reserve lowers rates. The central bank plans to cut rates by half a percentage point this year and by a full percentage point in 2025.
The Fed’s rate-cutting efforts are also increasing gold’s appeal over treasuries, which typically compete as a haven. By 3 pm ET on Tuesday, the 10-year US treasury yield was around 3.7 per cent, down from the over 4 per cent return on bonds available just a couple of months ago.
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Silver benefits from gold’s rise
Meanwhile, silver is also gaining from the rally in its sister metal, with prices rising by about 34 per cent this year. Joni Teves, a precious metals strategist at UBS Group, attributes silver’s rise to investors seeking catch-up buying opportunities. The bank also raised its price target for gold to USD$2,700 per ounce by mid-2025.
Silver’s exposure to the economic cycle is greater because it also serves as an industrial commodity used in clean-energy technologies, such as solar panels.
What’s terrible for markets and investors can be great for companies that profit from a higher gold price.
Over the past couple of years, shares of gold mining companies have underperformed relative to gold, mainly due to rising costs and decreased interest. In 2022 and 2023, a sharp increase in the all-in sustaining cost (AISC)—the cost to produce one ounce of gold—heavily impacted mining stocks, leading many investors to lose confidence in the sector.
The underperformance of gold mining stocks relative to the metal itself has created an opportunity. Currently, these stocks are trading at levels that do not reflect the ongoing rise in gold prices. Since gold mining stocks typically move independently of the broader market, they offer a degree of diversification that can help hedge portfolios against market downturns.
For example, a high gold price can significantly benefit companies like Calibre Mining Corp. (TSE: CXB) (OTCMKTS: CXBMF) by increasing their profit margins.
When gold prices rise, the gap between production costs and sale prices widens, leading to higher profitability, especially if operating costs remain steady.
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Calibre Mining is a sponsor of Mugglehead news coverage
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