Even as gold prices continue to hit new record highs every trading day, the rally might still have some legs, according to the World Gold Council. 

Gold hit a new high of $4,258.76 per ounce on Thursday. Its future trajectory hinges on investor reactions to tactical and fundamental elements. 

“In our view, comparisons to 1979 are enticing but misleading,” the WGC said in its latest update. 

Driving factors behind gold’s rally

There are reasons to believe that gold’s run has not run out of steam, especially in the broader macroeconomic context.

Factors that could further support prices include easing high real interest rates, widening credit spreads, and corrections in overvalued equities.

Short-term volatility may stem from portfolio rebalancing, market corrections, and technical signals, WGC said. 

However, long-term resilience is supported by an expanding investor base, ongoing policy uncertainty, and the continued growth potential within the gold investment market, the council added.

In our view, gold’s strategic strengths continue to balance the tactical risks as this new stage unfolds.

On Thursday, the surge in gold prices was driven by investor demand for safe-haven assets amid US-China trade tensions and the US government shutdown. 

The anticipation of potential interest rate cuts further fueled this demand.

Gold, a traditional safe-haven asset during unstable periods, has seen a 61% increase this year.

Potential challenges and short-term volatility

On the other hand, WGC said gold faces potential challenges around the $4,000 per ounce level, with several factors suggesting a possible correction. 

Strategic investors may rebalance portfolios as gold allocations near targets, while technical indicators point to an overbought market. 

Additionally, tighter credit conditions, a potential dollar short squeeze, and dampened consumer demand could contribute to short-term volatility, especially if geoeconomic risks subside, the council said.

“However, despite short-term volatility, gold’s strategic foundation remains robust,” WGC added. 

The continued long-term demand for gold is a tale woven from several threads. 

Long-term resilience and sustained demand

A diverse investor base has grown, thanks in part to the rise of low-cost ETFs and 1oz COMEX futures, while regulatory shifts in China and India have opened new avenues for institutional strategic allocations, according to WGC. 

Adding to this narrative is the ongoing weakness of the US dollar, which encourages foreign entities to hedge their positions and consider moving away from US assets. 

Furthermore, persistent US policy uncertainty and escalating geopolitical tensions cast long shadows, fueling a consistent need for gold. 

And finally, the spectre of inflation and a weakening labour market could hint at an increased risk of a recession, further contributing to the story of sustained demand.

Gold’s rally this year is primarily attributable to a surge in investment demand, predominantly from Western investors, WGC said. 

This increased demand reflects a global search for safe havens amid geopolitical tensions, a weaker dollar, anticipated further Fed rate cuts, and concerns about an impending equity market correction. 

Complementing this, sustained central bank gold purchases have both absorbed supply and reinforced the positive market sentiment.

“Rising prices have undoubtedly led to increased investor interest, further accelerating momentum. This is notable in gold ETF flows, which added US$21bn since the end of August to bring the y-t-d total to US$67bn,” WGC added.

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