Gold Monthly View for March 2024

The Fed in its March 20th policy decision kept its key interest rate unchanged and more importantly signalled that it remains on track to cut interest rates by 75 basis points in 2024, easing market concerns of fewer rate cuts amid recent data showing sticky inflation. Markets are now pricing in a greater chance, around 65%, that the Fed will begin cutting interest rates at the June policy meeting, up from 55% before the Fed policy. Both equity markets and gold have rallied in March in response to this dovish hold.

In the quarterly economic projections, the Fed indicated that it sees the US economy growing at 2.1% this year compared to 1.4% expected in December’s quarterly projections, and the unemployment rate is seen at 4% in 2024, versus 4.1% anticipated. The Personal Consumption Expenditures Price Index, excluding food and energy, is projected to rise at a 2.6% rate this year, compared to the 2.4% previously predicted. It is clear that the Fed doesn’t see the US economy falling into recession and expects inflation to continue to trend toward its 2% goal.

International gold prices moved past the $2200 barrier for the first time closing the month ~8.80% higher at $2208 per ounce. Domestic gold prices too rallied close to INR 70,000 levels per 10 grams, up ~7.20% for the month.

The Personal Consumption Expenditures (PCE) Price Index, increased to 2.5% y-o-y in February. The reading met expectations and followed January’s 2.4% increase. The Core PCE Price Index rose at an annual pace of 2.8%, in line with the market expectations and slowing from a 2.9% increase reported last month. Following the release, Fed Chair Jerome Powell noted that the data “is along the lines of what we would like to see”. While inflation has been slowing, growth is also weakening making a case for rate cuts a more probable one. US manufacturing sector weakened further in February with the US ISM Manufacturing PMI falling to 47.8, below estimates of 49.5, and 49.1 in January.

While hiring in the US continued at a strong pace in February, it was accompanied by a slowdown in wage growth and an uptick in unemployment. Nonfarm Payrolls in the US rose by 275,000 in February. This surpassed the market expectation of 200,000. The payroll data for December and January was revised down by a combined 167,000. The Unemployment Rate climbed to 3.9% from 3.7% in January. Average Hourly Earnings were up 4.3% on a yearly basis, below the market expectation and January's reading of 4.4%.

All in all, US economic data continues to reaffirm bets for an imminent shift in US monetary policy stance.

While transition to lower interest rates bodes well for gold, much of it seems to have already been priced in. This could limit the upside for the precious metal going forward.

Further meaningful upside from these levels can come on the back of a more dovish stance by the US central bank in response to a sharp deceleration in growth or a financial accident - S&P Global has downgraded five regional US banks due to their exposure to commercial real estate which has been struggling with higher borrowing costs and low occupancy rates post the pandemic, meanwhile burgeoning US public debt continues to be a cause for concern with Larry Fink of BlackRock Inc, the world’s largest asset manager, recently saying the situation “is more urgent than I can ever remember”.

On the other hand, if the Fed doesn’t meet the market’s expectations with regards to quantum and timing of rate cuts given that inflation continues to be sticky above its target, gold could see some consolidation. Downside will be limited by fundamental backdrop of interest rates peaking, lingering geopolitical conflicts in Russia-Ukraine and the Middle East and strong central bank gold buying.

Data Source: World Gold Council

Above article is authored by Quantum.

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