The price of gold has been surging vigorously, driven by a multitude of favorable factors that have culminated in record highs. As of October 22, spot gold prices ascended by over 1%, nearing the astonishing figure of $2750 per ounce—an unprecedented peak in history. This upward trajectory continued into October 23, when gold prices yet again surpassed the $2750 mark, shattering previous records.

Lu Zhenxing, the head of the Financial Research Institute at Baocheng Futures, commented on the tenacity of gold in an environment where the U.S. Federal Reserve is anticipated to lower interest rates. Augmented by escalating geopolitical tensions in regions such as Ukraine and the Middle East, gold resumed its upward path after a brief pause. Recent U.S. retail sales data exceeded market expectations, indicating a resilient U.S. economy, which has further ignited inflationary expectations among investors, propelling gold prices higher.

After a spectacular rise of over 30% this year, will gold prices face a correction? Can the lustrous appeal of gold persist amidst such volatility?

The reasons for gold’s new heights are manifold. Among the most significant are political uncertainties surrounding the U.S. elections and ongoing conflicts in the Middle East. Such factors have invariably heightened the demand for safe-haven investments. Expectations of further loosening of monetary policies by the Federal Reserve have also exacerbated the bullish sentiment regarding gold.

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The phenomenon popularly referred to as the “Trump trade” is closely intertwined with the rising prices of gold. Kelvin Wong, Senior Market Analyst at OANDA for the Asia-Pacific region, noted that in the wake of uncertainty surrounding the U.S. elections, investors gravitate toward gold as a hedge. Many speculate that Trump’s policies could bolster gold prices or exacerbate trade tensions, not to mention increase budget deficits.

The tension in the Middle East remains another substantial factor for the sustenance of gold prices. Following a wide-scale missile attack by Iran on Israel on October 1, Israel has vowed retaliation, with threats to strike Iranian oil facilities. Iranian President Ebrahim Raisi declared on October 22 that each Israeli attack would receive a fitting response.

On the monetary policy front, while there has been a slight cooling in the anticipation of rate cuts from the Federal Reserve, the sentiment leaning towards eventual reductions has remained steadfast, which bodes well for gold. Mary Daly, President of the San Francisco Fed, indicated that the Fed is likely to continue lowering rates to prevent further weakening of the labor market. "So far, I haven’t seen any information suggesting that we would not continue to cut rates. Given that inflation is approaching 2% for the economy, current rates are very tight, and I do not want to see further deterioration in the labor market," she expressed.

As per the insights of Zhong Zhengsheng, Chief Economist at Ping An Securities, the soaring gold prices also reflect market anxiety regarding the sustainability of U.S. fiscal policy and the credibility of the dollar. Following the outbreak of the Russia-Ukraine conflict in 2022, the U.S. imposed a slew of economic sanctions, raising doubts internationally about the dollar's status. In the first half of 2023, discussions surrounding “de-dollarization” gained momentum against the backdrop of declining international reserves in dollars, a banking crisis in the U.S., and approaching debt ceiling dilemmas, leading to significant increases in gold prices.

Mohamed El-Erian, Chief Economic Advisor at Allianz, pointed out that the sustained purchasing of gold by foreign central banks is a critical factor in the precious metal's strength. Countries and enterprises outside the U.S. are increasingly seeking potential alternatives to the dollar-based payment systems.

However, as gold prices soar, the threat of short-term corrections looms large. Notably, even as U.S. Treasury yields and the dollar have recently surged, gold maintains its ascent. Lu Zhenxing remarked that the relationships between gold, the dollar, and yields have distinctly changed since 2023, often rising and falling together, reflecting shifts in their respective credits. The expansive monetary policies enacted during the pandemic and subsequent sanctions have long-term ramifications on the credibility of the dollar, reaffirming gold as a trustworthy asset, highlighted by the surge in central bank gold purchases recently. Therefore, while some periods may reflect a co-rising or co-falling relationship, short-term trends tend to oscillate independently.

Historically, the negative correlation between gold prices and 10-year U.S. Treasury yields has weakened since 2022, demonstrating a "strong gold, weak bonds" paradigm. Zhong Zhengsheng analyzed that from 2003 to 2021, the correlation coefficient between gold prices and real yields on 10-year Treasuries was -0.91, but from early 2022 to September 2024, it increased to 0.44, indicating a temporary retreat in the traditional negative relationship. The divergence notably began after the outbreak of the Russia-Ukraine conflict in March 2022, with gold prices increasingly “immune” to the rebounds in real yields thereafter.

Looking ahead, is a correction in gold prices likely? Zhong Zhengsheng believes that with the Fed poised to cut rates, gold appears considerably more attractive compared to U.S. Treasuries, positioning it for even stronger performances. However, the dense speculative positioning, recent rebounds in yields, and improving economic outlooks in China could potentially cool demand in Asia, putting gold prices at risk of short-term adjustments.

He elaborated that the recent uptick in U.S. Treasury yields could exert accumulating pressures on gold prices. Historically, during scenarios of a "soft landing" in the U.S. economy, 10-year Treasury yields often rebound in the 1 to 2 months following an initial rate cut. Once the Fed starts its rate-cutting cycle, there may be upward pressures on both the economy and inflation. As of October 1, the Atlanta Fed’s GDPNow model projected a 2.5% annualized growth rate for the U.S. economy in the third quarter. The Fed's expectations as well as recent stronger-than-expected nonfarm payroll data have contributed to a notable rebound in 10-year Treasury yields, cumulatively affecting gold prices. Despite the correlation between gold and Treasury yields having diminished compared to previous years, it has not been entirely extinguished; the rise in gold prices from April to September 18 notably coincided with falling real yields.

Nonetheless, the likelihood of a drastic pullback in gold prices appears minimal, as Lu Zhenxing asserted, anticipating that gold is unlikely to undergo a steep correction. Both long-term fundamentals and short-term dynamics favor a continued ascent in gold prices. Data from the Commodity Futures Trading Commission shows non-commercial net long positions have increased since March. Although there may be fluctuations in the short term, this could lead to temporary instabilities in prices.

Could gold prices eventually escalate to $3000? Despite the remarkable surge exceeding 30% this year, Wall Street analysts largely believe that the upward trajectory of gold is far from over. Paul Wong, a market strategist at Sprott Asset Management, stated that following the peak prices, gold appears to have entered a new bullish phase. “Driving factors such as central bank purchases, increasing U.S. debt levels, and a potentially peaking dollar suggest that a fresh bullish market for gold is underway, with central banks and investors likely to allocate to precious metals,” he stated.

Michael Widmer, a commodity strategist at Bank of America, echoed similar sentiments, remarking that the current outlook for gold is more favorable than ever. Heightened government debt levels combined with geopolitical uncertainties seem to be setting the stage for further investments in gold, as investors seek refuge in safe-haven assets amid global market turbulence.

Increasingly, analysts posit that gold could persist in its upward march, with prices reaching $3000 per ounce no longer a distant thought. Analysts at the Commonwealth Bank of Australia anticipate the average gold price could hit $2800 per ounce in the fourth quarter, with projections of touching $3000 per ounce by the fourth quarter of the following year amid an overall weakening dollar.

Citi also forecasts that gold prices could reach $2800 per ounce within three months, with potential ascension to $3000 within the next 6 to 9 months. Despite a decline in retail demand over recent months, gold prices remain robust, with buyers willing to pay a premium.

Compared to U.S. Treasuries, gold has become increasingly favored among investors. Zhong Zhengsheng elaborated that gold and Treasuries have traditionally both been deemed “safe assets,” which typically appeal during rate-cutting cycles or in the wake of global risk events. During the rate-cutting cycle of the Federal Reserve in 2019 and amid the disruption of the COVID-19 pandemic in 2020, both the gold futures and non-commercial long positions in Treasuries were at historically high levels. However, post the Russia-Ukraine conflict and surrounding the current Fed easing agenda, gold remains highly positioned, while long positions in Treasuries have waned considerably. Given that the Treasury market dwarfs the gold market, any spillover of capital either leaving or entering the Treasury market could have pronounced effects on the gold market.

Looking ahead, Lu Zhenxing opined that the cadence of Fed rate cuts might lead to volatility in gold prices at elevated levels, ushering in some uncertainties along the way. Nevertheless, he remains optimistic about the market, suggesting that gold prices may ascend to another tier. In the short term, geopolitical conflicts are likely to raise demand for safe-haven investments, while economic data could stimulate inflation trading. From a long-term standpoint, the Fed's rate-cutting cycle and the bolstered credibility of gold will persist in underpinning gold prices.