The world does not revolve around AI stocks; other assets perform very well. A notable example is gold, which surpassed $3,500 per ounce for the first time in history last week. Since the beginning of the year, the precious metal has gained up to 30%.
To put that in perspective, the S&P 500 and Nasdaq have only risen 10% and 11.3% in the same period, while BTCUSD has risen around 12%. It's not just about geopolitics; despite Trump's attempts, tensions show no signs of abating, whether in Eastern Europe or the Middle East.
One of the main factors driving the latest rise in gold prices has been increased expectations of a Fed interest rate cut, even if only by 25 bp. Following the sharp downward revision of U.S. labor market data for May and June, the chances of a long-awaited monetary policy easing increased significantly.
According to the CME FedWatch tool, there is now an 89% chance that the Fed will cut rates to 4.00-4.25% at its September meeting, down from the current 4.25-4.50%. With two more meetings ahead, rates could fall even further by the end of the year unless the macro prevents it.
The thing is that while the U.S. labor market does seem to be cooling (Friday’s unemployment data will be key), last week’s PCE figures suggest the inflation battle isn’t over. The Fed’s preferred inflation gauge — the PCE deflator — rose 0.2% month-over-month and 2.6% year-over-year in July.
Although the annual pace remains below the Fed's forecasts, the trend shows signs of acceleration.
Donald Trump has also boosted gold's momentum, specifically with his repeated attacks on Fed officials, whom he is pressuring to change monetary policy “the right way.” Of course, the Fed is supposed to maintain its independence and make decisions based on its dual mandate of full employment and stable inflation.
If policy changes begin to reflect political pressure, confidence in the Fed could be undermined. It is no surprise that Treasury yields and the dollar index have reacted negatively after each of Trump's outbursts against Powell or other Fed members. If he ultimately gets his way, market conditions could deteriorate further.
Last but not least, trade tensions also play in gold's favor. For example, amid growing friction with India, reports suggest that New Delhi has been reducing its holdings of U.S. Treasuries while increasing its gold reserves in response to Trump's widespread tariffs. China is also reducing its holdings of Treasuries.
In summary, if the Fed cuts interest rates more aggressively, geopolitical tensions remain high, and the dollar continues to weaken, gold could exceed $3,600 by the end of the year. That said, things can change quickly — so it’s worth keeping a close eye on how the story unfolds.
