Gold shone brightly this year; What's next?

The intensification of geopolitical risks, the prospects of easing the monetary policy of the Federal Reserve or the purchases of the central banks supported the upward trend of the price of gold this year which, from the end of 2023 until the middle of this week, had an increase of 22%, in while the S&P 500 index appreciated by 16%.

Wall Street's big banks have a positive outlook for the yellow metal in the medium term, even if some of the elements that fueled its rise, such as purchases by the People's Bank of China, are out of the picture for the time being, and the precious metal is marking half a year new historical records, which raises concerns about price sustainability.

• Goldman Sachs: "Gold has significant value in hedging portfolio risks against geopolitical shocks"

Goldman Sachs estimates that gold should reach $2,700 an ounce early next year, up 7.5 percent from this week's mid-week spot price of $2,511 an ounce.

"In this milder cyclical environment, gold is the commodity in which we have the most confidence in near-term growth," the Goldman analyst team led by Samantha Dart wrote in a note, according to an article published last week by Business Insider.

The analyst pointed out that based on the current setup, other commodities such as oil, natural gas and copper are not nearly as attractive as gold. In his view, there are three reasons why investors should buy the yellow metal:

1. "We believe that the massive purchases of gold by central banks, which have tripled since mid-2022 due to fears related to US financial sanctions (n.r. imposed on Russia) and the sovereign debt of the United States represent a structural element and will continue whether the purchases are reported or not."

2. Imminent interest rate cuts by the Federal Reserve are poised to bring Western capital back into the gold market, a component largely absent from the yellow metal's steep rise over the past two years.

3. Gold has significant value in hedging portfolio risks to geopolitical shocks, including rising rates and debt fears."

In a hypothetical scenario where credit spreads widen due to rising debt concerns, Dart estimates the price of gold could rise 15% from current levels.

On the other hand, as the price of the yellow metal has appreciated, demand from China's central bank has diminished. But the analyst believes that if the price falls, the bank is likely to re-enter the market with large buy orders, protecting against a major drop in commodity prices. "We think gold's price sensitivity insures it against hypothetical large price declines, which would likely revive China's purchases," Dart said, according to Business Insider.

• Interest rate cuts and demand for gold for value preservation purposes - reasons why BofA analysts are "bullish" on gold

Bank of America also has a bullish outlook on gold, forecasting the price of the precious metal to reach $3,000 an ounce in 2025, according to invezz.com.

In a recent note to clients, the bank's commodities team wrote: "We believe gold can reach $3,000/oz in the next 12-18 months."

Interest rate cuts by the Federal Reserve and significant global demand for gold as a store of value are the reasons BofA analysts have a positive outlook for the precious metal, according to the source.

Much of the rise in the price of gold this year has been driven by steady purchases by central banks around the world, especially China. This, given that gold is seen as a safe haven asset and often bought in periods of volatility and geopolitical uncertainty. It is also used as a hedge against inflation by traders.

In recent weeks, the spot price of gold has risen amid expectations that the Federal Reserve will cut interest rates at its next monetary policy meeting on September 18. Lower interest rates are seen as positive for gold as they lower the opportunity cost of owning bullion.

• Blue Line Futures: "The concern is that the Fed will cut by 50 basis points and be done"

Phil Streible, chief strategist at market research firm Blue Line Futures, believes that not all interest rate cuts by the Federal Reserve are good for the bullion.

"For gold traders, the concern is that the Fed will cut by 50 basis points and be done with it - that would not bode well for the gold market. Traders are trying to determine how many cuts we will see and over what period of time," Streible was quoted as saying by mining.com, adding that "gold needs to see continued cuts" to support its next stage of growth.

Traders see a rate cut by the Federal Reserve this month as certain, with a 13 percent chance the U.S. central bank will cut as much as 50 basis points (0.5 percent), according to the CME FedWatch Tool.

• JP Morgan: "As money market yields become less attractive, we may see a return to retail inflows into ETFs"

JP Morgan economists expect the structural elements that have supported gold's rise so far to remain the driving force for the yellow metal's upward trajectory, according to a report published in mid-July.

"Many of the positive structural factors for a real asset like gold - including US fiscal deficit concerns, the diversification of central bank reserves into gold, inflation hedging and a tense geopolitical climate - that have driven prices to new all-time highs this year, will likely remains in place regardless of the outcome of the US election this fall," wrote Natasha Kaneva, head of Global Commodity Strategies at JP Morgan. "However, the precious metals markets will be alert to any potential policy changes that may influence one of these themes."

Regarding central bank purchases, Gregory Shearer, Head of Base and Precious Metals at JP Morgan, said: "We believe that the level of the gold price has minimal impact on banks' long-term purchase plans, however, price changes appear to influence the pace and cadence of acquisitions'.

The People's Bank of China halted gold purchases in May, ending an 18-month period of massive buying. However, JP Morgan's expectation is that other central banks will continue to buy gold, thus supporting the price of the yellow metal higher.

In addition, the onset of the rate cut cycle may increase investor appetite for gold, manifested through purchases of ETFs, which may contribute to future rallies in the precious metal. "As money market yields become less attractive, we may see a return of retail inflows into ETFs," Shearer said.

Over the past decade, gold has delivered an average annual return of 8.4% in US dollar terms, consistently outperforming inflation, making it an attractive option for long-term investors looking to preserve the purchasing power of money, according to an analysis by by Ole Hansen, Head of Commodity Strategy at Saxo Bank, published this week.