Gold Monthly View for January 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. Federal Reserve policymakers’ signal to maintain a restrictive stance till they are sure of a sustained slowdown in inflation also contributed to the dialling back of market expectations. Resultingly the US Dollar Index moved up from sub 102 levels to above 103. The ongoing tensions in the Middle East also boosted demand for the Greenback. US bond yields too began to reflect the higher for longer Fed stance with the US 10-year Treasury bond yield moving from 3.90% to 4.18% during the month before ending the month flattish. Gold which started January at the $2060 per ounce levels lost ground to higher US Dollar and yields; moving closer to the $2000 mark as the month progressed. While diminishing odds for aggressive policy easing by the Fed in 2024 capped the upside, geopolitical risks and resulting risk aversion kept the asset class in favour. The precious metal ended the month ~1.20% down, near $2040 per ounce levels. Domestic gold prices closed the month ~0.92% lower.

The US Personal Consumption Expenditures (PCE) Price Index held steady at 2.6% on an annual basis in December. Meanwhile, the annual Core PCE Price Index, which is the Fed's preferred inflation measure, slowed more than expected to 2.9% from 3.2% in November. Despite this slowdown in underlying price pressures, a stronger preliminary US GDP print which suggested that the economy grew by 3.3% in Q4 of 2023, higher than the projected growth rate of 2.0%, cemented market expectations that the rate easing cycle may not come as early as initially thought. The S&P Global Flash US Composite PMI came in at 52.3 in January, above December’s 50.9, the fastest rise in business activity since June 2023.The Manufacturing PMI rose into expansion after 8 months at 50.3 in January, up from December’s 47.9. The Services PMI improved to 52.9 in January up from December’s 51.4. The US economy added 2,16,000 new jobs in December as compared to 1,70,000 expected, while the unemployment rate held steady at 3.7% compared to expectations for an increase to 3.8%. Retail sales in the US increased by 0.6% month-over-month in December, higher than the 0.3% rise we saw in November and beating forecasts of 0.4%.

The US economy’s resilience on multiple grounds has made the job tougher for US policymakers as improving economic outlook could keep price pressures elevated. Premature rate cuts could risk restimulating the economy and reignite price increases. Also, while there has been progress on the inflation front, it remains above target. The Fed, as widely anticipated, kept interest rates unchanged in the range of 5.25-5.50% for the fourth time in a row in its January meeting. Chair Powell also pushed back against speculation of rate cuts stressing they are in no rush in shifting the current monetary policy. The CME Fedwatch tool indicates expectations of a 25-basis point rate cut in March have moved down to 35% from 73% at the end of December.

The situation in the Middle East remains volatile with potential to escalate into a broader regional and international crisis. Supply chains and oil prices remain vulnerable to flare ups in the region. A peaceful resolution appears unlikely at this stage, which should keep markets on edge and keep gold relevant as a portfolio diversifier.

Gold is likely to lose some appeal and stay volatile in the near term due to uncertain monetary policy path, but downside will remain limited given the eventuality of rate cuts in 2024 and growing geopolitical unrest. Investors can use this period of consolidation to build their long-term exposure to gold.

Data Source: Bloomberg , RBI

Above article is authored by Quantum.

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