This morning, the gold price reached an impressive €73,198 per kilogram, just €176 away from the highest price ever recorded in euros. Simultaneously, the gold price in dollars hit a new record at $2,482 per troy ounce.

Although the summer months are typically quiet in the investment markets, this year we are witnessing fireworks. The well-known market adage “Sell in May and go away… but remember to come back in September” would not have been a good strategy this year. Investors who sold their gold positions would have missed out on a 5% profit (in euros). The new record prices for gold, S&P500, NASDAQ, and AEX indicate an optimistic investment climate.

But what is driving this new record high for gold? The biggest driver behind last week's surge is, as you might have guessed, interest rate expectations. Remarks from Fed Chairman Jerome Powell, including the potential for rate cuts and a less strict inflation policy, have excited gold investors.

On Monday, Powell stated that the Fed will not wait for inflation to reach the 2% target before cutting rates, due to the delayed effects of policy changes. He mentioned that the Fed is looking for "greater confidence" that inflation will return to the 2% level. In June, the monthly inflation rate decreased for the first time in over four years.

This has strengthened market sentiment. According to the CME FedWatch tool, the market is now convinced that the Fed will cut rates in September (with a 98.1% probability). When interest rates fall, gold usually becomes more attractive than fixed-income investments like bonds.

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Did you know that last month (June 2024), the US paid $140 billion in interest on its debt? This amount represents 30% of the total tax revenue for that month. Therefore, lower interest rates would also benefit the US budget.

Fun fact: If you made a chain with 140 billion one-dollar bills, it could wrap around the Earth 541 times. That's an unimaginably large amount of dollars!

Since May 1, 2024, the interest rate on the 10-year US Treasury note (US10Y) has fallen by 0.5 percentage points to 4.2%. In this case, the market adage "Sell in May..." might have been useful. I have previously written about the massive bond market and how, with falling interest rates, other investments like gold and silver become more attractive.

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Despite the current record high, there is still room for further increases in the gold price. As I mentioned earlier, interest rates could continue to fall in the coming years. Additionally, there is a certain correlation between the VIX index and gold. The VIX index, a popular measure of expected volatility in the stock market based on S&P 500 options, provides insight into market stability. A score below 20 is considered 'stable,' while a score above 30 means 'highly volatile.' Values between 20 and 30 indicate volatility.

When gold reached a peak in April of this year, the VIX was at 20. This was largely due to tensions in the Middle East between Iran and Israel. Market volatility often indicates fear, and since gold is often seen as a safe haven during times of uncertainty, the gold price tends to rise during such periods. With the US elections in November approaching, we might see another increase in volatility and, consequently, a rising gold price.

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