Real US Interest Rates Jump But Gold Hits New Records as Debt Warnings Grow Before Election 2024
Monday, 10/21/2024 15:00
GOLD PRICES in all major currencies continued to hit new record highs on Monday, setting the 34th new peak of 2024 in Dollar terms despite the US currency and real interest rates both climbing to 2-month highs as the International Monetary Fund warned over swelling public debt ahead of America's Trump-vs-Harris election day,
writes Atsuko Whitehouse at BullionVault.
Spot gold prices hit a new high at $2738 per Troy ounce, surging nearly 33% year-to-date and setting fresh records in the London bullion market for the 4th consecutive session.
That marks the strongest year for gold price performance since 1979, when
gold surged as oil-driven inflation peaked alongside the Soviet invasion of Afghanistan and the Iranian hostage crisis.
"Something
strange has happened to the price of gold over the past year," says Mohamed El-Erian, former CEO of fund management giant Pimco and now chief economic advisor to its German financial services parent Allianz.
“In setting one record level after the other, gold seems to have decoupled from its traditional historical influencers, such as interest rates, inflation and the dollar."
Because gold pays no yield but is seen as protecting against a higher cost of living, the price of bullion typically moves in the opposite direction to real interest rates, as implied by inflation-protected 10-year TIPS bonds.
But that yield has risen by 23 basis points over the past 3 weeks – within the top 10% of 3-week moves over the past 2 decades – hitting the highest level since August 1.82% on Monday as expectations recede that the US Federal Reserve will follow September's half-point cut to overnight interest rates with more sharp cuts in its last 2 decisions of the year
thanks to strong US economic data.
Historically, a rise of that size in real US interest rates coincided with the gold price dropping by 1.2% on average. But defying that
negative gold-real-rates correlation in fall 2024, the price of gold has risen by 2.8% in the past 3 weeks, and since February it has now risen on each of the 9 occasions when TIPS yields rose by 20-to-25 basis points.
“While lower rates are still bullish for gold, which doesn’t pay interest or dividends,
higher rates don’t necessarily put pressure on bullion anymore,” says an analysis from US financial giant Bank of America, repeating its gold price target of $3000 per ounce and citing growing concerns over the US government's funding needs and their impact on the US Treasury market.
Ahead of today's International Monetary Fund (IMF) annual meeting in Washington, the think-tank and lender-to-governments warned that
public debt worldwide is set to reach $100 trillion by the end of this year, hitting 93% of global gross domestic product and driven largely by the US and China.
The non-partisan US Congressional Budget Office (CBO) projects that next year
the US national debt will exceed annual economic output for the first time since 1946, immediate aftermath of the Second World War, and will increase further above 122% by 2034.
Separate analysis from the non-partisan Committee for a Responsible Federal Budget (CRFB) estimates that, depending on who wins the White House next month, the policies of Donald Trump and Kamala Harris would
add $7.5trn and $3.5trn respectively to the debt from 2026 to 2035.
Elsewhere, the central bank of gold No.1 mining and consumer nation China today cut its benchmark lending rates again as part of stimulus measures aimed at boosting growth in the world’s 2nd-largest economy.
While the IMF estimates China’s central government debt only equals 24% of national economic output, it says overall public debt – including local government debt – now stands about $16trn, worth 116% of GDP.
Gold prices on the Shanghai Gold Exchange today flipped to a premium over London quotes for the first time in over 2 months, finally reversing this month's
deep gold discounts signalling weak Chinese demand but still offering importers a historically low incentive of $6 per ounce, even as gold priced in the Yuan hit an all-time high for the 6th consecutive session at ¥624 per gram.
Spot gold in Euros also reached a fresh high above €2523 London lunch time, marking a nearly 34% increase in 2024, while
the UK gold price in Pounds per ounce hit a new peak of £2102, up 28% year-to-date.
The price of silver, primarily needed by industrial uses, rose a further 1.3% to $34.13 per ounce after surging 6.9% last week to a 12-year high and also jumping 35% this year.
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