The global economy and financial markets are in a transitional period. Bond yields have moved generally sideways as Western central banks have kept policy rates on hold. But pressure is mounting on policymakers as they balance lower but stubborn inflation and signs of cooling labour markets.
This is exemplified by the sooner-than expected rate cut by the European Central Bank (ECB), while the Bank of England and US Fed have so far stayed put. Meanwhile, India remains one of the economic bright spots, and China will likely continue to find alternative measures to invigorate growth.
In this context, we analyse how gold may react to current market expectations and explore the drivers that could lead to a different outcome.
Analysis based on QaurumSM and our Gold Valuation Framework suggests that the gold price today broadly captures consensus expectations for H2 in relation to economic growth, interest rates and inflation. This, in turn, implies that gold may continue to move in a similar range to what we have seen in recent months.
In other words, after gaining good momentum in the first half of the year, current market trends indicate a range bound performance from its current levels during H2. It’s not the first time we have described a similar anticipated outcome for gold. And, at face value, a sideways move does not seem very exciting. But it encapsulates two important insights.
First, we are naturally using, expected rather than observed values for each of the drivers; in this context, a range bound return suggests that the gold market is fairly efficient and broadly reflects the available market information.
Second, given that gold is already up by more than 10% and consensus suggests a similar result for the full year, it reiterates that gold – supported by contributions from other sectors – can perform well even when rates remain as expected.
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