Gold prices rise for 3rd straight week, hit 3-month high. Can bullion reclaim $5,500 peak?

Gold prices surged to a near three-month high on Friday, extending gains for a third straight week as a weaker US dollar and the US Treasury’s decision to increase bond buybacks supported demand for the yellow metal. Spot gold rose 2% to $4,603, taking its weekly gain to 5%, after earlier touching its highest level since May 29.

What drove gold higher this week?

Weaker dollar

The rally was supported by a softer US dollar and efforts by the US Treasury Department to keep longer-term yields under control. The dollar was headed for a weekly decline, making dollar-priced commodities more affordable for holders of other currencies.

US Treasury's bond buyback move

The US Treasury has announced that it will double the size of buybacks of longer-dated Treasury securities over the next quarter to at least $4 billion per operation. Treasury Secretary Scott Bessent has also said the government could increase the repurchases further.


The move is aimed at helping keep longer-term Treasury yields under control. This is supportive for gold as lower bond yields reduce the opportunity cost of holding the non-yielding asset. Gold can also benefit if the move puts pressure on the US dollar, as a weaker dollar makes the metal cheaper for buyers holding other currencies.

Hopes of the US Fed holding rates

Traders are now pricing in a 67% chance that the Fed will keep rates unchanged next month, while the probability of a hike stands at 33%, according to the CME FedWatch Tool.

While gold is typically seen as a hedge against inflation, higher interest rates tend to reduce bullion's appeal because it is a non-yielding asset.

Can gold hit record high again?

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.

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.

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