Gold Monthly View for April 2024

Starting April near the $2200 per ounce level, gold saw a $200 movement during the month touching a fresh all-time peak, as risk aversion took hold of markets due to a tit for tat confrontation between Israel and Iran. The escalating geopolitical tensions offset the impact of higher US 10-year bond yields (up ~50 bps) and stronger US dollar (up ~1.8%) which were buoyed as expectations for a Fed rate cut in June waned on the back of elevated inflation and a resilient US economy. As the situation in the Middle East calmed down, the precious metal gave up some gains and ended April closer to $2300 per ounce, up ~2.3% for the month. Domestic gold prices moved up by ~2.5% aided by a slight depreciation in the Indian Rupee.

US GDP grew by 1.6% y-o-y in the first quarter of 2024, notably slower than 3.4% in Q4 of 2023. US S&P Global Composite PMI moved lower to 50.9 in April compared to March’s 52.1, indicating a slowdown in private sector expansion. While slower growth would typically make it conducive for the Fed to cut rates, sticky inflation and mixed economic data is complicating the matter.

The Fed’s preferred inflation gauge increased 2.8% y-o-y in March, the same as in February. As a result of uptick in inflation in the first three months of the year, Federal Reserve officials and Chairman Jerome Powell have made hawkish comments off late, indicating that the lack of progress on the inflation front warrants keeping interest rates higher for longer. Nonfarm Payrolls rose by 303,000 in March, significantly higher than February as well as estimates, pushing the unemployment rate lower to 3.8% from 3.9% last month. This strong price and labor market data tempered June rate cut probability from close to 60% at the start of April to 10% by the end of the month.

While the Fed, in its 1st May policy announcement, kept the policy rate unchanged in the range of 5.25% to 5.5% and signalled that they require more confidence on the inflation front to cut, they also announced a slower pace of balance sheet reduction going forward ($25 billion each month from earlier $60 billion) – a move which is being perceived as slightly dovish. Fed Chair Powell also dismissed speculation about rate hikes which provided support to gold prices.

While a delay in interest rate cuts is fundamentally negative for gold in the near term, the medium-term outlook for the metal is constructive. While the Fed continues to communicate its cautious stance on inflation and in turn rate cuts, it is to be noted that the Fed’s last summary of economic projections indicate that the median FOMC member anticipates 75 basis points of interest rate cuts to a range of 4.5-4.75% by end-2024.It is thus likely that the US central bank will cut rates to some extent and at some point in the second half of this year.

Given that US economic growth slowed down in Q1CY24, it should help contain inflation in the months ahead. However, flare up in geopolitical conflicts, fiscal or monetary efforts to support the economy in the run up to US elections and the just announced slowdown in Fed balance sheet reductions could negatively influence the inflation situation, keeping gold relevant.

In the near term, gold prices could be choppy reacting to US monetary policy and geopolitical developments. In the medium term, the outlook for gold is bright given the imminent rate cuts by the Fed. Investors can stagger purchases to build their gold allocation.

Data Source: Bloomberg; RBI

Above article is authored by Quantum.

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