The past two weeks have seen gold prices surge to unprecedented heights, culminating in a remarkable breakthrough on October 18, when spot gold surpassed the $2,700 mark for the first time, closing the week at $2,720. The momentum is particularly striking as it marks a sharp rise following a recent breach of the $2,500 threshold in September.

Goldman Sachs has pointed to a notable influx of capital into gold exchange-traded funds (ETFs) amid a reshuffling of investment portfolios leading up to the U.S. elections. According to their analysis, regardless of the election's outcome, ongoing declines in global interest rates, coupled with an enduring increase in central bank demand, suggest that gold prices could continue their upward trajectory. If Donald Trump emerges victorious in the elections, gold may see even further gains due to potential risks concerning Federal Reserve independence and associated geopolitical risks, such as tariffs.

Interestingly, silver, with its more industrial attributes, has outperformed gold in recent times, with spot silver bursting through the $33 threshold on October 19, a level not seen since December 2012. The price surge was fueled by investor flight to safety and optimism surrounding stimulus measures to rejuvenate the Chinese economy, with silver prices rising as much as 6% in the process.

As we look into the factors influencing the recent price surge, it is essential to consider how dynamics such as interest rate cuts, geopolitical tensions, and central bank purchases have supported the gold price. However, the ongoing changes in the U.S. election landscape have become increasingly significant.

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On October 18, gold reached a new high of $2,696, reflecting a 1% increase from earlier in the week, ultimately breaking the $2,700 barrier. Traders have indicated that the inflow of ETF investments primarily drives this gain, as institutional investors rebalance their portfolios in anticipation of the upcoming elections. Recent polls have shown a marked increase in Trump’s approval ratings, leading the market to believe he may have an edge in the elections next month. Betting markets such as Polymarket are predicting Trump's likelihood of winning at around 60%, compared to Kamala Harris's 40%. However, it is important to note that many betting accounts are held by multiple individuals or even by the same person and do not necessarily reflect a purely American sentiment.

Nevertheless, UBS researchers conveyed their insights to reporters, stating that both candidates seem to be equally matched. They anticipate that uncertainty and volatility may escalate until a new U.S. government is firmly established.

Geopolitical tensions have also been increasingly influential in this environment. Numerous sources have indicated that the driving force behind short-term gold price increases is the prevailing geopolitical risk rather than interest rate adjustments. Following Israel’s announcement regarding the elimination of Hamas leader Yehya Sinwar, market worries have heightened concerning potential escalations in Middle Eastern conflicts. Even with President Biden advocating for an end to the war, Israeli Prime Minister Benjamin Netanyahu has vowed that Israel will continue its operations until all hostages taken by Hamas are released.

A range of factors will likely sustain gold prices moving forward. Wellington Management informed reporters that their outlook leans favorably towards commodities, particularly gold and oil. By 2025, they predict that gold will continue to benefit from reductions in policy rates, traditionally synonymous with heightened demand for the precious metal. Central banks' appetite for gold remains robust, and retail demand in China and India has increased, bolstered by encouraging tax incentives.

In early September, First Financial reported that a rise in gold prices to $3,000 appears to be only a matter of time. Since the third quarter began, the bullish momentum in gold has prompted several Wall Street investment banks to revise their target prices upwardly. Many institutions have set year-end or mid-year targets around $2,700, with some forecasting $3,000 as a possibility. In less than two months since early September, gold has seen a sizeable surge of nearly $200.

For non-yielding assets like gold, central bank rate cuts have unmistakably highlighted gold's intrinsic value. Furthermore, the trend of central banks acquiring gold remains crucial—in fact, the Federal Reserve's rate cuts have been largely priced into the market. The disconnect between gold prices and interest rates witnessed this year can be ascribed predominantly to ongoing central bank purchases. Although the Chinese central bank has paused its acquisitions since May, India's gold imports reached record heights as of August, particularly following the Indian government's announcement to cut tariffs from 15% to 6% on July 23, which stimulated import demand.

Nonetheless, the potential for a correction cannot be overlooked. "Gold prices already faced a pullback ahead of the CPI release in the U.S., and there was another short-term adjustment post a data surprise; however, this correction was temporary before continued upward movement," noted James Stanley, a senior market strategist at Gainscope Group. "On October 18, the bulls surged again to hit the previous peak of $2,685, followed by a retracement to an initial support level of $2,670. Shortly after, they achieved yet another new high."

"We witnessed profit-taking by bulls around $2,700, prompting the next round of correction. In this context, the earlier high point of $2,685 will serve as a crucial support zone—if this level falters, aggressive profit-taking may intensify, leading us to watch levels around $2,675 or $2,667. Nonetheless, in the medium to long term, gold prices are still inclined to trend upward," he added.

China's Stimulus Policies Boost Silver Prices

Meanwhile, silver, which had been relatively dormant for some time, is now experiencing a resurgence, with last week's gains even surpassing those seen in gold.

On the evening of October 18 during U.S. trading hours, spot silver decisively broke through the $33 threshold for the first time since December 2012. By the close, silver prices had surged by as much as 6.18%, reaching $33.655 per ounce, concurrently setting new historical highs alongside gold.

Traders are optimistic that should silver maintain above this $33 critical line, it may quickly ascend towards $34.35. The notable drop in recession risk in the U.S. (as seen in positive September non-farm payroll figures and CPI data exceeding expectations) has contributed to bolstering market confidence. Additionally, continuous economic stimulus measures from China, along with silver's industrial uses, have ignited trading enthusiasm. Heightened geopolitical risks could offer additional support.

On October 18, China’s National Bureau of Statistics released economic activity figures for September and the third quarter. Actual GDP growth for the third quarter eased slightly to 4.6%, down from 4.7% in Q2, exceeding market expectations of 4.5%. Seasonally adjusted quarter-on-quarter growth, however, increased from 0.5% in Q2 to 0.9% in Q3.

Nomura reported that China’s industrial production and retail sales both exceeded expectations, with year-on-year growth in September hitting 5.4% and 3.2%, respectively (market forecasts were 4.6% and 2.5%). This marked a significant rebound from August's figures of 4.5% and 2.1%. The recovery in industrial production was particularly stimulated by electric vehicles and solar panels, with September production of these two products seeing year-on-year growth accelerate to 48.5% and 8.2%, respectively, compared to previous figures in August of 30.5% and a negative 9.0%. Conversely, the ongoing decline in the real estate sector has stymied growth in cement production, which remained negative at -10.3% in September, showing little change from August’s -11.9%. However, beneficial policies promoting upgrades in household electronics and automobiles resulted in significant retail sales growth of 20.5% for home appliances and 0.4% for vehicles in September, a notable recovery from 3.4% and -7.3% in August.

Looking ahead, market institutions speculate on whether silver will continue its upward trajectory. The current gold-silver ratio has declined from nearly 90 to 80.73. Considering historical averages, there is potential for the ratio to decrease to around 60, indicating there might still be room for silver to catch up.

However, a strengthening dollar could constrain the upside potential. Analysts seem inclined to expect that under a Trump presidency, the dollar might initially strengthen. Traders will likely keep a close eye on further developments in Chinese policies alongside any shifts in global risk sentiment. Recent adjustments in expectations regarding significant Fed interest rate cuts have also been noted, with markets now predicting a potential interest rate reduction of slightly less than two 25 basis points cuts by year-end, down from nearly 75 basis points before the October 4rd non-farm payroll announcement.