Arguably, the recent strength in the gold price should come as a surprise to no-one, given that it was the expectation of future real and nominal interest rate increases that was keeping a lid on it in the first place.
In this case, we believe that there is a strong parallel with the late 1970s, when the gold price materially re-based from US$315/oz in August 1979 (when real interest rates were -0.438%) via US$382/oz in October 1979 (when real interest rates were 3.428%) to US$653/oz in January 1980 (when real interest rates were back at 0.091%).
Moreover, the end of the gold bull market in 1981 did not occur until real interest rates in the US reached 4% on a sustainable basis.
In this case, the Fed appears to have either ended or paused the interest rate tightening cycle much earlier than in the late 1970s parallel.
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This alone will provide powerful upward pressure to the price at a time when there is already a surfeit of geopolitical instability.
At the same time, the other major deflationary factor – the deliberate deflation of the Fed’s balance sheet and therefore, inevitably, the total US monetary base – also seems to have run its course, with this particular measure now at its highest level since April 2022. As such, according to our analysis, gold is well underpinned around the US$2,000/oz mark by fundamental factors.
Any additional speculative pressure could realistically take it to US$3,000/oz with US$4,500/oz an outside possibility.
