Gold is "poised for a breakout"! JP Morgan: The strongest catalyst is "deteriorating U.S. employment leading to Fed rate cuts"

Despite the temporary suppression of gold performance by trade agreements, gold prices are poised for a breakout, and a Federal Reserve interest rate cut may be the next breakthrough opportunity.

According to news from the Wind Trading Desk, JP Morgan stated in its latest research report that the key to future gold price surges lies in whether ETF capital inflows can reignite, which requires the Federal Reserve to fulfill interest rate cut expectations and push down U.S. real yields, with deteriorating U.S. employment data being the biggest bullish catalyst.

Specifically, JP Morgan indicated that central bank gold purchases provide support for gold prices, and ETF capital inflows are the key driving force behind price increases. Since ETF capital inflows are sensitive to real interest rates, gold needs the Federal Reserve's interest rate cuts to achieve an upward breakout. In an optimistic scenario, gold prices are expected to move towards a target price of $3,675 per ounce by the end of the year, and are projected to reach $4,000 per ounce by early next year.

From a technical indicator perspective, JP Morgan noted that the consolidation trend of gold over the past few months remains positive in the medium-term outlook, with key support at $3,245 per ounce, and an upward breakout will seek consolidation pattern targets of $3,604 and $3,881.

Central Bank Gold Purchases Provide Bottom Support

Gold failed to maintain a breakthrough above $3,400 per ounce again this week, with prices retreating after news of progress in the U.S.-EU trade agreement. Since May, gold prices have mainly fluctuated in the range of $3,200 to $3,400 per ounce. Reports indicate that the announcement of trade agreements between the Philippines and Japan, as well as progress reports on the U.S.-EU trade agreement, have suppressed gold prices.

However, JP Morgan stated that the long-term structural bullish narrative for gold remains intact, and gold is still seeking its next catalyst. From a technical perspective, the months of consolidation in gold prices indicate that the medium-term outlook remains positive, having digested the overbought condition.

Central bank gold purchases continue to maintain strong momentum. In May (the latest complete data month), reported central bank gold purchases rose month-on-month to 20 tons, with purchases in the first five months of 2024 increasing by approximately 4% year-on-year. The People's Bank of China continues to purchase gold, with a reported increase of about 2 tons in June.

Broader trends show that the intensity of gold demand from the People's Bank of China has recently eased, with reported net gold imports in June falling to about 48 tons from the strong levels of the previous two months, while the Shanghai gold price premium has also been relatively moderate. As trade agreements progress and the focus of central bank demand shifts, gold is seeking its next catalyst.

ETF Creation Will Drive Gold Price Breakthrough, Requires Decline in Real Yields

Continuous gold purchases by official departments will continue to provide bottom support for gold, but to sustain a breakthrough above $3,400 per ounce and further increase, further capital inflows into ETFs and an increase in futures long positions are needed.

JP Morgan's gold price forecast assumes a net increase of 715 tons (+22%) in global gold ETF holdings this year, which is one of the key factors driving gold prices to reach $4,000 per ounce by early next year Since the beginning of the year, global ETF holdings have increased by 407 tons (12.6%), completing just over half of the expected amount, with approximately 203 tons from the United States, 86 tons from China, and 118 tons from other regions. The relative stability of ETF inflows in China is encouraging, but the overall ETF inflow has recently lacked the intensity seen earlier this year.

Among them, ETF fund inflows remain sensitive to real interest rates, especially in terms of large monthly ETF inflows. JP Morgan stated that since 2010, there have been 25 instances of global gold ETF holdings increasing by 3% or more in a month, corresponding to an average monthly increase in gold prices of about 4%. In those 25 months, 21 months were accompanied by a monthly decline in the U.S. 10-year real yield, with a median monthly decline of about 13 basis points. This means that the timing and magnitude of the Federal Reserve's interest rate cuts will directly affect gold's performance.

The Federal Reserve's interest rate cuts will determine the direction of gold price breakthroughs, with a weak labor market being the biggest upward trigger

Ahead of the Federal Reserve's meeting next week, Federal Reserve Governor Waller has called for a rate cut in July, but JP Morgan economists believe this position is unlikely to gain widespread support. The market currently assigns about a 63% probability to a rate cut in September, with a cumulative cut of about 43 basis points by the end of 2025.

The evolution of inflation and labor dynamics will continue to be crucial, ultimately determining the intensity of the gold market's response. The strongest reaction in gold prices will come from a significant deterioration in U.S. labor data prompting a rate cut.

JP Morgan stated that persistently weak private employment growth data will be sufficient to change market sentiment and confirm a rate cut in September. In this scenario, the decline in yields may gain stronger momentum, accelerating the rotation of funds into gold ETFs and the futures market.

Here are two scenario forecasts:

Goldilocks scenario: Economic growth is resilient, but the Federal Reserve is sufficiently reassured about the inflation backdrop to ease policy, which could still excite the gold market, pushing prices to break through $3,500/ounce and move towards the target price.

Strongest bullish scenario: If U.S. labor data shows more substantial deterioration, prompting the Federal Reserve to cut rates, it will drive the greatest bullish response in gold ETF demand and prices, solidifying the trend towards breaking through $4,000/ounce