Shining bright: Gold prices at an all-time high and unlikely to dip anytime soon

• Expectations of softer Fed policy in 2024 are driving down US yields and US dollar and driving up gold.
  
• Uncertainty in the Middle-East has brought safe-haven buying in gold.
  
• Market participants await US labour market data this week, for fresh cues on the Federal Reserve’s monetary policy path.
  

Gold prices reached a historical high on Monday, surpassing the global mark of $2,100 per ounce globally. In India, gold prices have remained strong for almost three weeks and have been hovering around ₹64,000 for 10 grams (24k).

In fact, a World Gold Council report expects one in four central banks to increase their gold reserve holdings which mean more demand. This and conditions in the Middle East have analysts expecting an upside in 2024 with prices moving towards $2,200.

First, why are gold prices at an all-time high?

There are multiple factors at play behind the rally in the yellow metal’s price.

Expectations of a Fed rate cut

There's growing consensus that the rate hiking cycle in the US is over given softer labour market data and slowing inflation numbers coming out of the US economy. The Fed is widely expected to leave rates unchanged at 5.25% to 5.50% at its December meeting.

“Markets are also expecting roughly 125 bps of cumulative interest rate cuts by December 2024, with the first cut expected as soon as March 2024. These renewed expectations of softer Fed policy in 2024 are driving down US yields and US dollar and driving up gold,” says Ghazal Jain-Fund Manager- Alternative Investments- Quamtum Asset Management Company.

Agrees Sachin Kothari, Director At Augmont Gold For All, “After raising interest rates by 550 bps for 18 months, FED has finally paused and there are chances that they will cut interest rates from March 2024. US bond yields which were trading above 5% two months back have retraced below 4.2% now amid the change in FED stance.

Future outlook

Market watchers expect the yellow metal to at least hold around $2,000 per ounce in the first part of next year.

“Market participants await US Labour market data this week, for fresh cues on the Federal Reserve’s monetary policy path,” say analysts at Kotak security.

If the interest rate rate cycle has peaked, that should keep gold well supported. However, according to Jain, rate cut expectations and the up move in gold is vulnerable to a reversal in the short term in case of a higher for longer Fed stance or hawkish Fed commentary to push back against market expectations and loosening of financial conditions.

“New asset allocation would start from January and would take gold prices higher again, as long-term fundamentals are very strong. For 2024, the target is $2250 (Rs 68000),” says Kothari.

Most investors believe that the Federal Reserve has finished raising interest rates and are now anticipating potential rate reductions next year, potentially as soon as the first half of 2024. However, Jerome Powell, the Chair of the US Federal Reserve has sounded a word of caution.

“Fed chair Jerome Powell said that policymakers are prepared to tighten policy further if it becomes appropriate to do so, while swaps were pricing in Fed rate cuts as early as May 2024,” says analysts at Kotak Securities.

Gold as a safe-haven asset Geopolitical tensions in the Middle East is another key factor for the 15% rally in gold prices in the last two months.

“Despite many efforts that have been put into place by the United Nations and other countries to put a ceasefire and end this war, but in vain. This uncertainty has brought safe-haven buying in Gold, which is considered to be the best safe-haven asset in the time of crisis,” says Sachin Kothari, Director At Augmont Gold For All, an integrated gold platform.