Gold prices jump 7% to log best weekly gain in 8 months. Start of another yellow metal bull run?

Gold prices staged a powerful rebound this week, surging 7% as a sharp decline in crude oil prices eased investor fears of a US Federal Reserve rate hike and reignited demand for the yellow metal.

Spot gold rose 2.3% on Friday to $4,336.02 per ounce, after rising more than 3% earlier in the session to its highest level since June 17. The yellow metal posted its biggest weekly gain since January 19, with prices climbing more than 7% over the week. The rally marks gold’s strongest weekly performance since January, when the precious metal surged to a record high of $5,500 per ounce.

Further, U.S. nonfarm payrolls fell by 23,000 jobs last month after a downwardly revised increase of 20,000 in June, according to the Labor Department’s Bureau of Labor Statistics. Economists polled by Reuters had expected payrolls to rise by 80,000.


The weaker-than-expected jobs data presents a scenario where the Fed may not raise interest rates at its next meeting. Further, declining energy prices, coupled with the potentially reduced likelihood of a U.S. interest rate hike, point to a weaker dollar and stronger gold prices.

Gold has had one of its most volatile starts to a year in recent years. The precious metal soared to record highs in January, crossing $5,500 per ounce, before tumbling to $4,100 per ounce by August. The sharp correction came as renewed tensions over the Iran war sent oil prices soaring, fuelling expectations that the US Federal Reserve could raise interest rates later this year.

What led to the gold spike this week?

1.) Easing prices amid peace optimism

Hopes of peace in the Middle East pushed inflation expectations lower, allowing gold to break out of a multi-week consolidation above $4,000. U.S. President Donald Trump told reporters that he believed the war with Iran would be over soon.

Crude oil prices were headed for a weekly loss, helping ease inflation concerns and reducing expectations of higher-for-longer interest rates. Gold is an inflation hedge, but elevated interest rates tend to weigh on its appeal as the precious metal offers no yield.

2.) Central bank buying resilient

Central bank demand has remained a key support for gold despite the sharp correction in prices. According to the World Gold Council, central banks purchased 288.9 tonnes of gold in the second quarter, a 62% increase from a year earlier. South Korea has now joined that list, with its central bank returning to the gold market after 13 years, reinforcing the trend of sustained official-sector demand.

South Korea’s central bank last bought gold between 2011 and 2013, acquiring 90 tonnes at an average price of $1,629 an ounce for a total investment of about $4.7 billion, according to figures from Korea Economic Daily.

The World Gold Council believes central banks remain on course for another strong year of net purchases, supported by portfolio diversification and inflation- and risk-hedging requirements. However, annual demand is expected to finish below the 2025 total.

Start of a big gold rally?

The recent pullback may have created an opportunity for investors to gradually start accumulating gold, according to Jefferies’ Global Head of Equity Strategy Christopher Wood and billionaire hedge fund manager John Paulson. Both suggest that the precious metal could be at the beginning of a long-term bull run.

"As people lose faith in paper currencies, gold as an alternative will continue to grow," Paulson said in an interview with CNBC. Paulson, whose bet against subprime mortgages became one of the most profitable trades in Wall Street history, turned his attention to gold in 2009.

He argued that fiscal and monetary stimulus following the financial crisis would eventually weaken the US dollar. Since then, gold prices have roughly quadrupled, crossing the $5,000 threshold before pulling back.

Paulson said demand for bullion is continuing to broaden, led by central banks adding to their reserves alongside rising interest from the private sector.

"Gold is becoming the most apt reserve currency in the world, replacing fiat currencies," Paulson said in an interview with CNBC. "The demand from central banks, for instance, has continued to grow, as has the private sector."

However, Paulson believes investors could benefit more from owning gold mining companies than bullion itself, particularly companies with large undeveloped reserves. "I think the greatest way to invest is to invest in early-stage gold stocks," he said.

Christopher Wood, in his Greed and Fear report, said investors should once again begin accumulating gold and gold mining stocks after an extended pause.

Also read: Explained: Why South Korea bought gold after 13 years and what it means for yellow metal investors?

Wood draws a parallel with the dot-com bust, arguing that when the Nasdaq-led technology sector drove the market lower, the bear market had by late 2000 spread beyond technology to other sectors as it became clear that the unwinding of the dot-com boom would affect the broader economy.

He believes a similar scenario could unfold if the AI capex boom implodes, which he says would happen if credit issues come to the fore.

This comes despite the broadening of the US equity market since the AI capex boom and the related increase in wealth effect in the US stock market, which have been among the main drivers of US economic growth over the past three years, along with easy fiscal policy.

The World Gold Council echoes this view. At current levels, gold prices are broadly aligned with a global backdrop of moderate growth, cooling but still elevated inflation, and expectations of further, but limited, central bank tightening. Under these conditions, gold is likely to remain relatively rangebound, within a range of ±5%.

However, the stage could be set for a possible breakout. On the upside, clear catalysts such as a worsening economy, a renewed geopolitical shock, a shift towards lower interest-rate expectations or a wave of dip buying could reignite gold’s momentum and push prices back towards US$4,500/oz or above. If the signals are strong, gold could move even higher.

Also read: Closing Auction Session: Why Sebi says the new framework is better than VWAP

Risks to the gold rally

The rally, however, faces risks. Resilient economic growth, rising yields and calmer markets could put further pressure on gold. Even so, a decline of more than 10% from current levels could be limited by bargain-hunting demand.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)