Gold Outpaced Equities in 1H: Can the Rally Continue?

Gold defied expectations in the first half of 2024, outperforming equity markets and showcasing its enduring appeal as a safe-haven asset. Spot gold prices on the Multi Commodity Exchange surged a robust 14%, eclipsing the benchmark Nifty50 index. Globally, the yellow metal climbed nearly 13%, reaching a price tag of $2,380 per ounce, defying the headwinds of persistent high interest rates.

This unexpected rally underscores gold’s unique role in an investor’s portfolio. In a climate of sluggish global growth and heightened risk aversion, investors flocked to gold’s perceived safety. Continued central bank purchases and ongoing geopolitical uncertainties further fuelled the flames.

Gold exchange-traded funds (ETFs) experienced a welcome resurgence, with global inflows reaching $1.4 billion in June. Notably, this marked the second consecutive month of positive inflows, according to a World Gold Council report. Asian investors, particularly, displayed robust demand, driving a record $3 billion into Asian gold ETFs during the first half. While North American and European funds witnessed outflows, the positive inflows in June and May significantly limited global gold ETFs’ year-to-date losses to $6.7 billion.

Can Gold Maintain Its Glitter?

With gold prices hovering near record highs in both domestic and international markets, the question on everyone’s mind is: can this rally sustain itself?

Geopolitical tensions and the strained US-China relationship are likely to continue driving demand for gold as a safe haven in the medium term. However, a potential game-changer could be a US Federal Reserve interest rate cut. As a non-interest-bearing asset, gold becomes a more attractive investment option when interest rates fall.

Optimism is growing around the possibility of an earlier-than-expected Fed rate cut. Dismal economic data released last week has fueled speculation that the Fed might pivot towards monetary easing as early as September. According to a recent ING report, “Swap traders are now pricing in a 75% chance of a rate cut in two months.” ING anticipates a more aggressive easing policy, projecting three rate cuts this year compared to the current market expectation of two.

Potential Headwinds

While the outlook appears bright, some factors could dampen gold’s momentum. A significant reduction in central bank purchases, particularly by China, which did not add to its gold reserves for the second consecutive month in June, could pose a challenge. Similarly, a decline in investment demand from Asian investors could also act as a brake on the gold price rally.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.