Thanks to escalating geopolitical risks, the prospect of Federal Reserve interest rate cuts, concerns over the US budget deficit, inflation hedging, and central bank buying, the gold price has repeatedly hit new highs in 2024. On July 17th, spot gold once again broke the historical record, surpassing $2480 per ounce.

The gold price surged rapidly this year, partially due to the easing of stubborn inflation and market expectations that the Fed will cut interest rates multiple times within 2024. In theory, a weaker dollar and lower US interest rates will increase the appeal of non-yielding gold. However, it is worth noting that since early 2022, the relationship between gold and US real yields has significantly decoupled, and this decoupling has further intensified this year.

Gregory Shearer, head of Morgan Stanley's precious metal strategy, said,

"Gold's recovery has come earlier than expected because it has further detached from real yields. Since the fourth quarter of 2022, we have been structurally bullish on gold. After the gold price broke through $2400 in April, the rally was earlier and more intense than expected. Previously, the expectation of Fed interest rate cuts was delayed, and the strong US labor and inflation data pushed real yields up, so the rally in gold was particularly surprising."

Economic and geopolitical uncertainty is often a positive factor for driving gold prices up, as gold has the ability to act as a safe haven and a reliable store of value. With low correlation to other asset classes, gold can be used as a hedge and insurance during market declines and geopolitical pressures.

In addition to interest rate factors and geopolitical concerns, data shows that physical holders are also unwilling to sell gold. Although the gold price has risen sharply, the financial market generally resists shorting gold, highlighting the structural bullish factors for gold beyond US real yields.

"Against the backdrop of geopolitical tension, increased sanctions, and de-dollarization, we have seen an increase in demand for physical assets such as gold," Shearer said.

As the gold price hovers near historical highs and interest rates are expected to start falling, will precious metals usher in a new round of gains?

Natasha Kaneva, global commodity strategy director at Morgan Stanley, said that despite the strength of the dollar and rising US yields, structural bullish factors such as US fiscal deficit concerns, central bank reserve diversification, inflation hedging, and geopolitical tensions have driven gold prices to new highs, and these factors may remain unchanged during the US presidential election in the fall of this year.

"Nevertheless, the precious metal market will focus on potential policy changes that could intensify or alter these themes."

"Of all metals, we are most confident in our mid-term bullish outlook for gold and silver for 2024 and the first half of 2025, but it is still crucial to seize the timing of entry," Shearer said. Any pullback in the next few months could provide an opportunity for investors to start positioning before the Fed starts its rate-cut cycle.

Will the gold price set a new high?

As structural bullish factors for gold remain unchanged, Morgan Stanley has raised its gold price targets for 2021 and 2025.

According to estimates by Morgan Stanley Research, the gold price is expected to climb to $2500 per ounce by the end of 2024. It is worth noting that this prediction still assumes that the Fed will start cutting interest rates in November 2024, pushing the gold price to a new nominal high.

"The gold price will continue to rise in the next few quarters. We predict that the average price in the fourth quarter of 2024 will be $2500 per ounce, and $2600 per ounce in 2025. The risk still tilts towards earlier-than-expected upswing," Shearer said. The gold price forecast is based on Morgan Stanley's economic expectations, with US core inflation expected to fall to 3.5% in 2024 and 2.6% in 2025.

In addition to the upcoming interest rate cuts and increasingly tense geopolitical situation, central bank buying will be the main driving force behind the gold price in 2023, and this will continue in 2024.

According to data from the World Gold Council, with China at the forefront, central banks around the world purchased 1037 tons of gold in 2023. Similarly, at the beginning of 2024, the net purchase totaled 290 tons – the fourth highest quarter since the buying frenzy began in 2022. In contrast, Morgan Stanley expects central banks to buy a total of 850 tons of gold in 2024, or about 213 tons per quarter. Compared with the fourth quarter of 2023, net purchases in the first quarter of 2024 increased by 70 tons, despite the average gold price rising by 5 percent.

As the gold price hovers near historical highs and interest rates are expected to start falling, will precious metals usher in a new round of gains?

"Overall, the strong level of central bank purchases and the continuous rise in gold prices since the end of the first quarter have led us to consider the sensitivity of central bank demand to prices," Hill said."

"As central banks structurally buy more gold, they seem to be more tactical on price. "We believe that the level of gold prices has little impact on the long-term central bank buying program, but price changes do affect the pace and rate of net purchases," Hill added."

China's central bank purchases have slowed down, ending the vast buying period that lasted 18 months. However, other central banks and physical buyers are expected to continue to be strong bottom buyers, pushing up the bottom price of gold.

In addition to central banks, the increased demand from physical gold market investors will also be a major source of future gold price increases. Since mid-2022, the holdings of gold ETFs have steadily declined, but the demand from emerging market central banks and physical buyers has offset the outflows from ETFs, and the holdings of London gold vaults have still declined.

"The renewed increase in ETF holdings triggered by the interest rate cycle may quickly tighten the physical gold market, which is expected to have a positive impact on the gold price and support a rise in prices in the second half of 2024," Hill said.

"Although the current trend in gold prices may be completely decoupled from actual yields and Fed pricing, we still believe that as the attractiveness of currency market funds declines, this will add additional support later this year, mainly from retail funds flowing into ETFs. Despite the continuous decline in ETF holdings, the gold price has risen sharply, but the next shift may be quite bullish, pushing the gold price to continue to rise," Hill pointed out.