The price of gold made the biggest quarterly increase in 8 years. What happens next?

The price of gold increased by a total of 13.2 percent in the third quarter and ended September at $2,634.7 per ounce. It was the biggest quarterly increase since the first quarter of 2016, when gold rose 16.2 percent.

Gold gained a total of 5.2 percent in September, the biggest monthly gain since March of this year.

In September, gold was boosted by the Federal Reserve’s decision to cut interest rates by 0.5 percentage points. It was the first interest rate cut since 2020. The gold market also continues to be supported by strong physical demand, purchases by central banks and the fact that Western institutional money has also started to flow into the market.

In the long term, the growth cycle will also be fueled by the large budget deficits of the USA and several other countries, the explosive growth of interest payments on national debts, and the worsening of geopolitical tensions in the Middle East.

The Fed’s decision gave gold a boost

Although initially after the decision (on September 18) there were large up-and-down movements in the gold market within a few hours, records were reached the very next day. Gold peaked on September 26, closing at $2,672 an ounce. At the time of writing, gold is trading at $2,659.

Lowering interest rates usually also lowers the real yield on US Treasuries. This means that investors who buy bonds get a lower interest rate on them. Since gold is the second main safe-haven asset next to bonds, gold becomes more attractive to investors.

The next Federal Reserve meeting to decide on interest rates is on November 7. The markets are fully convinced that it will be decided to lower interest rates at that meeting as well. The probability of a 0.25 percentage point drop is considered 69 percent, the probability of a 0.5 percentage point cut is 31 percent.

The forecasts and price levels below should not be considered a recommendation. In the case of long-term investing, they are not so important (the market does not need to be timed) and it is mostly speculation based on market perception and the movements of the gold market over the last 20 years.

What’s next for the gold market?

The rapid increase in the price of gold following the Central Bank’s decision meant that gold is slowly approaching the price targets I set at the beginning of the year. In particular, I expect gold to trade in the $2,700-$2,900 range before the end of the year, likely breaking above the $2,900 level either late this year or early next year. As interest rate cuts continue, demand from central banks and the physical market is strong, and geopolitical tensions in the Middle East are intensifying, I don’t see a major correction coming anytime soon.

In my opinion, the $3,000 mark may turn out to be a bigger test for gold – that’s how it tends to be with big, round numbers. The $1,000 mark was a strong resistance for gold from March 2008 to October 2009. The $2,000 limit was an obstacle in 2020-2023. Although gold traded at $2,070 several times during that period, it only traded above the $2,000 level for a few weeks in total.

The breakthrough came in March of this year, when gold surpassed previous records and, crucially, the $2,000 level. Also, reaching the $3,000 level would mean that gold would have risen 85 percent, or nearly twice as much, from the 2022 lows (the 2022 low was reached in September at $1,621 an ounce).

Recent rapid price increases

Let’s look at gold’s ups and downs over the past 20 years. The faster phase of the last rising period (11.2015-8.2020) began in August 2018, and gold rose in price by 79 percent in two years. To date, gold is up a total of 66 percent from the September 2022 lows.

In this decade, the fast rising phases of the gold market have usually lasted 1.5-3 years before the correction. The exception is the period after the financial crisis that started in 2008, where the price of gold almost tripled in about three years. This was followed by a decline lasting more than 4 years, the depth of which reached 45 percent. However, I do not expect such a drop in the gold market, because the fundamental picture is too strong for that in the gold market. In my opinion, similar to the 2000s or 1970s, we have entered a long-term bullish period.

A correction is followed by an even faster rise

However, the reaction to the crisis will be once again money printing and an increase in budget deficits. Already, the US and many other countries are running huge budget deficits and interest payments on the national debt are exploding. At the same time, geopolitical tensions are intensifying, and a second wave of inflation is likely to be expected, as several underlying trends favor it – be it record debt burdens or deglobalization.

Therefore, after the next correction of the gold market, an even faster rising phase is likely to be expected, which does not so much resemble the rise following the financial crisis, but rather the rise of the stagflation period (non-existent economic growth, but rapid inflation) of the 70s. Let us recall that from 1971 to the beginning of 1980, gold rose in price 24 times.