Rate cut expectations to keep gold investment appeal intact

Gold prices gained +13% for the year ending 2023 after two years of lull returns- fuelled by the rising geo-political tensions during the year ( Russia-Ukraine, Israel- Gaza,) alongside the notion of toning down of the prevailing steep interest rates cycle, as policymakers have been successful in bringing down the inflation levels from four decades high of above 10% in US, to now around 3% by the end of 2023. While the yellow metal gained 0.7% in December, it was tad changed for the week to finish at $2072. Gold prices were solidly higher this year as global central banks’ purchases helped the precious metal.

The rally is likely to be continued in 2024 as Central bankers abruptly changed their tone on inflation in December, fuelling investors’ rate-cut bets. That followed a blockbuster November, when data showed U.S. and European inflation falling much faster than expected.

The week was volatile for dollar assets as the index hit a fresh 5 months low of 100.61, before recovering some lost ground to settle at 101.32 but still down 0.4% for the week, the index plunged 2% in December alone and ended the year down 2.1%. According to IMF study The U.S. dollar is currently overvalued by at least 10% against a basket of currencies and expects the U.S.’s relative interest rate advantages to diminish the strength of dollar further. The Fed triggered fresh market euphoria when it used its December meeting to say that rate hikes were over. Fed Chair Jerome Powell notably declined to push back against market bets on deep cuts next year, although the Fed’s “dot plot” envisaged three 25 bp cuts in 2024, compared to the more than 150 bps priced in by markets.

The 10-year yields closed 2023 at 3.87% following close of 3.83%. in 2022 but in the meantime, it fell as low as 3.25% on the spring regional US banking crisis and as high as 5.02% on the October debt rout.

The week ahead looks data heavy with markets would be looking for the US ISM manufacturing and Services PMI, US ADP payrolls on Wednesday, weekly jobless claims and outcome of FOMC minutes on Thursday, followed by the Non-Farm Payroll data on Friday, while China will release its Caixin manufacturing PMI and services through the week, which is expected to have advanced in December. The data from the Eurozone are expected to remain disappointing with manufacturing and construction PMI to show continued contraction in December but on positive sign inflation in eurozone is dropping fast lately due to decline in energy prices. UK’s major data include manufacturing and composite PMIs.

Last week the second tier sets of data from US showed economy has somewhat cooled off in December with Chicago Business Barometer plummeted to 46.9 in December from 55.8 in November, marking the largest monthly drop in over two years. The latest reading is worse than the 51.0 forecast and drops the index back into contraction territory. US Richmond composite manufacturing index fell to -11 this month from -5 in November, marking its 2nd consecutive negative reading. This month’s reading was worse than the forecasted reading of -7, The pending home sales were unchanged on monthly basis but lagged 5.2% on yearly basis. The US initial weekly claims climbed to 218,000 in the week ended December 23rd, an increase of 12,000 from the previous week’s revised level of 206,000 signalling slowdown in hirings.
Historically gold has performed well in the starting month of the year, according to WGC data Since 1971, gold has had an average return of 1.79% in January since 1970. We expect the trend to continue this year as well and yellow metal will remain supportive of the interest rate cuts, easing inflation and simmering geo-political worries. Support : $2050/$2020/$1985, Resistance : $2120/$2150

(The author is a Research Analyst, Sharekhan by BNP Paribas)

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