The recent surge in gold prices, reaching a new all-time high, is driven by several factors, notably the U.S. Federal Reserve's expected monetary policy changes. The market anticipates a September rate cut, possibly exceeding 0.25%, which is typically bullish for gold. Remarkably, gold has risen over 20% this year despite high interest rates. Additionally, central banks, particularly in BRICS countries like Russia, China, India, and Turkey, have dramatically increased their gold purchases, reflecting growing mistrust in the U.S. dollar. This trend is further fuelled by the BRIC countries accelerating their efforts towards de-dollarization. Commodities that were traditionally traded in dollars are increasingly being traded in local currencies or gold, which contributes to a weakening dollar. The combination of lower interest rates, a weaker dollar, and strong central bank demand creates a highly favourable environment for gold and it is plausible that gold could rise further.
A rate cut by the US Federal Reserve would push yield-hungry capital towards emerging markets (EM), though the surprise element of monetary policy is also important. Loosening faster than currently expected would potentially accelerate flows to EM. Quantitative tightening matters, too. The Fed curtailed QT in May, which is broadly positive for risk assets, including EM. Further steps to reduce or scrap QT, or even reinstating QE, would be EM-positive.
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