Gold Monthly View for February 2024

Fed Chair Powell made it amply clearly that the US central bank is in no rush to cut rates with his “danger of moving too soon is that the job’s not quite done” and the “the prudent thing to do is to just give it some time” comments. In response to this and the Fed’s status quo at the policy meet at the start of February, the US 10-year Treasury yields moved up from the 4% mark to hover around 4.3% and the US Dollar Index moved closer to 104 from 103 levels at the end of January. International gold prices ended the month 0.25% lower at $2032.8 per ounce. Domestic prices closed 0.67% lower.

Nonfarm payrolls in the US rose by 353,000 in January, significantly higher than market expectations of 187,000. The unemployment rate held steady at 3.7%. Average hourly earnings in the US grew by 0.6% month-on-month, higher than 0.4% in December. The headline US CPI softened to 3.1% year-on-year rate from 3.4% in December, but higher than expectations of 2.9%. The Core CPI, which excludes volatile food and energy prices, stayed sticky matching December's increase of 3.9% and higher than expectations of 3.7%. Second estimate US GDP for the fourth quarter of last year showed the economy expanded by a robust 3.2%, marginally missing first estimate of 3.3%. With payrolls, wages and prices rising and unemployment falling, a higher for longer Fed stance is back on the table. Expectations of a Fed rate cut have been pushed back from March to June with markets currently pricing a 53% chance of a cut in June. Markets now expect four rate cuts in 2024 vs. six cuts at the start of the year.

Despite this unwinding of rate cut expectations, gold is showing relative resilience. Geopolitical tensions in the Middle East and global growth concerns are acting as tailwinds. While the US economy has managed to weather high borrowing costs and tight credit conditions thanks to US fiscal spending and consumers running down their savings, the support from these factors is expected to wane in 2024, dragging down growth. Rising credit card and auto delinquencies in the US signal weakness ahead. US inflation too is slowly but steadily progressing towards the Fed’s 2% target, which too should support rate cuts. Additionally, the rapidly increasing interest costs on the $34 trillion US national debt too is expected to weigh on policymakers’ decision making, prompting them to cut rates.

As per data from the World Gold Council, central bank gold purchases in 2023 totalled 1,037 tonnes - just short of the record set in 2022. We believe this trend is likely to continue this year amid geopolitical tensions and the uncertainty on the macroeconomic front and act as a soft support for gold prices. As aggressive bets on Fed rate cuts unwind, global Gold ETFs have seen net outflows. Domestic gold ETFs on the other hand saw inflows of 657 crores in January probably driven by investors’ need to diversify their investments given that equity markets are gradually getting expensive.

Gold prices could remain choppy in the months ahead as the market reacts to geopolitical developments and US monetary policy. Medium term outlook for the precious metal looks promising given the imminent turn in US interest rate cycle.

Data Source: World Gold Council, RBI, Bloomberg

Above article is authored by Quantum.

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