Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Head of Commodity Strategy
Gold's record-breaking rise continues ahead of the US election, seen as a major risk event that could trigger a market reaction, especially if results differ from expectations of a Trump victory. Gold is up 5% this month and 34% on the year, second only to silver, which has surged 42.3%. These rallies prompt concern over potential unsustainable gains and a possible peak.
Currently, gold and silver show no euphoria—only strong rallies as investors seek safe assets amid concerns over fiscal instability, safe-haven demand, geopolitical tensions, de-dollarisation driving strong demand from central banks, Chinese investors turning to gold amid record-low savings rates, and recently, as mentioned, increased uncertainties surrounding the US presidential election safe-haven demand, geopolitical tensions, central bank de-dollarization, and increased demand from Chinese investors due to low savings rates and property market concerns. Additionally, rate cuts by the Fed and other central banks are reducing the cost of holding non-interest-bearing assets like gold and silver.
It is also worth noting the lack of response to the Middle East de-escalation seen in crude oil prices—which slumped the most in two years on Monday—leading us to conclude that the latest strength is increasingly being seen as a hedge against a potential “Red Sweep” at the 5 November US election, where one political party, in this case, the Republicans, controls both the White House and Congress. This scenario has lifted US bond yields amid concerns about excessive government spending, pushing the debt-to-GDP ratio higher, while fuelling inflation fears through tariffs on imports as well as geopolitical risks.
Besides the election, the market maintains a steadfast belief that the US Federal Reserve will announce a 25 basis-point rate cut at the 7 November meeting, further supporting demand in gold-backed ETFs. Following two years of net selling, total holdings in bullion-backed ETFs hit a low point in May before Western ETF investors finally returned as buyers, having been net sellers since the Federal Reserve began its aggressive rate-hiking campaign back in 2022. Read more about demand trends in the just published “Gold Demand Trends Q3 2024” from the World Gold Council.
Nothing ever goes in a straight line, and having rallied as much as it has, gold can still run into a deep correction—potentially after 5 November should the election result not deliver the keys to the White House and Congress to one party. However, as long as the mentioned reasons for holding gold do not go away, the prospect for even higher prices remains. With that in mind, we see the risk of a USD 100+ correction next week; however, as per the chart below, a correction will find support at USD 2,685, while a break below USD 2,600 is likely needed to trigger an even bigger move, which at that point would be led by long liquidation from hedge funds holding a 24-million-ounce long in the futures market.
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