Gold Monthly View for May 2024

Starting the month of May near the $2286 per ounce level, gold saw a $150 movement during the month touching a fresh all-time peak of $2420 largely buoyed by rising geopolitical tensions. On the other hand as investors grew apprehensive over U.S. rate cut timings amidst a backdrop of signs of strength in U.S. business activity, the precious metal gave up some gains and ended May closer to $2327 per ounce, still up ~1.8% for the month. Domestic gold prices moved up by ~1.96% aided by a marginal depreciation in the Indian Rupee.

Logically, expectations of higher for longer, rising inflation and signs of resilient US economy would usually have led to hardening of bond yields and appreciating dollar. On the contrary both moved opposite to conventional wisdom as uncertainty surrounding US elections and geopolitics weighed more on market sentiment leading to gold prices remaining supported.

The Fed’s preferred inflation gauge increased 2.7% y-o-y in April, the same as in March. As a result of uptick in inflation at the start of the year, Federal Reserve officials and Chair 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 175,000 in April, lower than 12 months average, pushing the unemployment rate to 3.9% from last month (Still in the range of 3.7-3.9%). This price and labor market data tempered rate cut probability to ~75% for September 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 signaled that they require more confidence on the inflation front to cut. However, 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 though. 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. 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.

US GDP in its second estimate grew by 1.3% y-o-y for first quarter of 2024, notably lower from the first estimate of 1.6% y-o-y and slower than 3.4% in Q4 of 2023 mainly due to downward revisions in consumer spending, private inventory investment, and federal government spending. US ISM Manufacturing and Services PMI have moved lower signaling a slowing economy. While slower growth would typically make it conducive for the Fed to cut rates, sticky inflation and mixed economic data is complicating the matter.

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 compel the Fed to consider any meaningful slow down in its decision making. There is also a possibility of a Fed U-turn from its recent hawkish tone if the growth surprises on the downside which would bode well for gold.

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: World Gold Council, RBI

Above article is authored by Quantum.

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