Gold monthly view for January 2023

Posted On Monday, Feb 06, 2023

Share:


Gold started the new year on a cheery note, up ~6% in January in dollar terms and ~4% in rupee terms. Underpinning the rally was annual inflation in the US slowing for a sixth straight month to 6.5% in December, raising hopes of smaller rate hikes from the Federal Reserve in Q1’23 and rate cuts later in the year. The yellow metal benefitted from a softer USD environment and lower US Treasury yields. Physical demand from China during the Lunar New Year celebrations, central bank gold buying and increase in net long positioning in gold by global money managers also supported prices. Financial markets also charged ahead with the S&P 500 Index up ~8% year-to-date as the Fed failed to convince markets of its commitment to raise rates.


Domestic gold prices rallied to all-time highs of Rs. 57,125 per 10 grams and international gold prices almost touched $1950 per ounce levels during the month before giving up gains closer to the Fed meeting on February 1st.


Prices moved up again starting February after the Fed, in its first meeting of the new year, raised its benchmark rate by only a quarter percentage point, to a range of 4.5% to 4.75%, slowing from December’s 50-basis-point increase after four straight 75-basis-point moves. Fed Chair sounded slightly dovish with his “disinflation process has started” comment. On the other hand, he put “couple of more rate hikes” on the table when he said, “job is not fully done”. He also said, “I don’t see us cutting rates this year” and that they would “sit tight while the economic data catches up to the policy.” But markets were too busy celebrating the smaller rate hike and the Fed nearing the end of its rate tightening cycle.


While US Q4’22 advance GDP estimate came in higher than expected and US unemployment rate as of December came in at 3.5%, still at 5-decade lows, other leading economic indicators are pointing to an economic slowdown. In the last five months of 2022, employers cut 110,800 temporary workers, which is a sign of broader job losses to come. Wage growth in the US as represented by the Average Hourly Earnings slowed to 4.6% y-o-y in December compared to 5.1% in November. The US housing starts in December fell 1.4% month over month and 21.8% year over year. US retail sales fell by the most in a year in December. Consumer confidence declined in January. U.S. manufacturing PMI for January came in at 47.4, representing the third consecutive contraction of manufacturing activity and the lowest PMI reading since May 2020. All in all, as the Fed’s aggressive tightening campaign works its way through the economy, the trajectory for the US economy is weakening. And the Fed seems to be noticing and probably getting anxious enough to start talking some dovishness to make it look like a transition rather than an abrupt U-turn.


At the same time, complementing slowing headline inflation, Personal Consumption Expenditure Price Index, the Fed’s preferred inflation gauge cooled to 5% in December and the Core version of this index which excludes the more volatile and seasonal food and energy prices, moved lower to 4.4%. The figures added to popular views that the worst bout of inflation is behind us.


The slowing pace of current rate hikes to 25 basis points can be seen as a sign that the central bank is either satisfied with the pace of slowing inflation or is getting nervous about their aggressive policy’s impact on growth. Either way we are not too far from the Fed scaling back. This makes the outlook for gold, which is highly sensitive to the rates outlook, positive.


The US Dollar weakened, and US Treasuries rallied after the Fed’s policy decision, pushing gold prices up back to $1950 per ounce levels. In a reversal of the trend seen in 2022, other currencies like the Euro are expected to strengthen in 2023. European PMI data in January suggested the region's economy is stabilizing in contrast to the US economy’s slowing down and the European Central Bank continues to hike rates, now at a faster pace than the Fed. This will continue to weigh on the dollar index.


Markets are also concerned over the US hitting its debt ceiling limit, with the US government divided over whether to raise the ceiling. A potential dilly-dallying by the US on its debt obligations could trigger some panic in global financial markets and undermine the confidence in the dollar. Although the can will be kicked down the road, such decisions or even temporary indecisions augur well for gold.


The Fed was wrong about inflation in 2021-22, calling it “transitory”. It could also be wrong about inflation in 2023 if it underestimates it. While costs of goods and energy have started to come down as transitory causes like supply snags and war disruptions ease off, price pressures in service sector excluding housing have yet to cool off. Given the strong labour market in the US and the post-pandemic pent up demand for going out, this part of the inflation basket could turn out to be sticky. Also, financial conditions in the US, as indicated by the Chicago Fed Adjusted National Financial Conditions index have eased to levels last seen in March of 2022, before the Fed embarked on its aggressive tightening cycle. There’s also the risk of Chinese demand rebounding which could stir up commodity prices again. As such, the inflation problem may not be truly behind us yet. This will keep gold relevant.


Even if Inflation moves lower, the Fed may be compelled to showcase a transition rather than an abrupt error in reading data, which could lead to a policy error where they tighten too much. In such a scenario they would be compelled to intervene and aggressively cut rates to undo the damage, thereby hurting their credibility and undermining the dollar. Even this should help gold.


With a couple of more rate hikes yet to come in, investors could take advantage of any price corrections in gold to build their allocation. Because once the rate hikes come to an end for good, which is likely to be by mid-2023, we can expect positive implications for gold prices. About the other variable of growth, if we see a recession in the US, albeit a shallow one, gold will be better placed than risk assets. Rate cuts in response to growth deterioration, which is not a question of if but when, will be constructive for gold prices. The only risk to the outlook for gold is a soft landing of the US economy which based on the current economic momentum looks unlikely.


Domestic gold prices moved up by about 1% post the Budget 2023-24 announcement. Finance Minister Nirmala Sitharaman maintained the status quo and did not reduce the custom duty on Gold as was widely anticipated. In response, domestic gold prices which were trading at close to 2% discount saw some of the discounts unwind.


With a duty cut now out of the picture for the foreseeable future, down moves in gold on account of that are no longer expected. But prices could see some headwinds from developments on the US monetary policy front. Investors can stagger their purchases over the next few months to build their gold allocation.


Data Source: World Gold Council


Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – www.QuantumAMC.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

View All

  • Gold Monthly View for January 2024
    Gold Monthly View for January 2024

    Posted On Monday, Feb 05, 2024

    Aggressive rate cut bets unwound in the first month of the new calendar year on the back of strong economic data in the United States.

    Read More
  • Gold Year End Wrap-up & Outlook 2024
    Gold Year End Wrap-up & Outlook 2024

    Posted On Friday, Dec 22, 2023

    After increasing interest rates by a massive 425 basis points in CY2022, CY2023 saw only 100 basis points of hikes by the Federal Reserve.

    Read More
  • Gold Monthly View for November 2023
    Gold Monthly View for November 2023

    Posted On Thursday, Dec 07, 2023

    Some of the geopolitical premium in gold unwound in November as the situation in the Middle East remained contained and did not turn into a wider conflict.

    Read More

Add To Cart

Add To Cart

Your cart is empty
Total of Lumpsum
Amount

Get In Touch

Take small steps in financial planning to achieve big dreams! Start your investment journey today!

@@tlcomstart@@ @@tlcomend@@