This article first appeared in The Edge Malaysia Weekly on April 15, 2024 - April 21, 2024

THE price of gold, which had ignored the persistent US dollar strength last week, pushing past the record US$2,300 threshold, is expected to maintain its upward trajectory due to expectations of global monetary easing, central banks’ continued buying of the precious metal as well as a play on its safe haven hedge amid escalating geopolitical tensions.

Spot gold was up 0.76% at US$2,395.48 per ounce last Friday. Bullion had powered to new highs last week, with US gold futures gaining 1.7% to US$2,413.30 by Friday.

Year to date, as at April 11, gold had rallied 13.11%.

OCBC’s FX strategist Christopher Wong tells The Edge that gold’s historical record since 2001 shows that it typically outperforms when the tightening cycle has concluded.

“That is the extended rate pause while expectations for rate cut builds ahead of the next rate cut cycle as well as during episodes of actual policy easing,” he explains.

“Firstly, when the US Federal Reserve actually cut interest rates in 2007 and 2008 as well as in 2019 and 2020, gold rose a further 10% to 15%. Secondly, during the periods when the federal funds rate was on hold at its peak cycle after the respective rate hike cycle had concluded in 2007 and in 2018, gold rose between 14% and 20%,” says Wong, noting that gold has rallied about 15% since July 2023, coming into the historical range of increase as observed before.

“If history is a guide, then gold may still have further room to run higher during the actual rate cut cycle. We expect gold to reach the US$2,435 level in the first half of 2024,” he forecasts.

The technicals for gold prices still look bullish, according to RHB Investment Bank Bhd’s chartist Joseph Chai. “We observed the commodity continuing to chart a fresh ‘higher high’ together with ‘higher low’ — showing [that] the bullish structure remains intact,” he notes in an April 9 report on gold.

Markets have been expecting the Fed to start slashing rates by June, for a total of at least three cuts in 2024. However, stubborn inflation in March led to expectations being dialled down last week from three to two rate cuts in 2024.

Meanwhile, markets are pricing in about three cuts for the European Central Bank, two cuts for the Bank of England and two more cuts for the Swiss National Bank (SNB) by end-2024. Note that SNB was the first major central bank to trim borrowing costs in the current cycle, reducing its key rate by 25 basis points (bps) to 1.5%.

“It has been a bumpy start to the year as we ended the first quarter. Foremost on many investors’ minds is the slowdown in China’s economy. Adding to this challenging setting is the slowdown in the eurozone economy, which narrowly averted a technical recession as Russia’s invasion of Ukraine now enters its third year — and further clouding the global economic outlook is the increasing pushback by the Fed to cut interest rates,” says UOB Global Economics & Markets Research in an April 3 report.

Amid investor concerns, the International Monetary Fund in its latest quarterly World Economic Outlook update in January raised its global growth projection for this year by 0.2 percentage point to 3.1% and reassured that “the risks to global growth are broadly balanced and a soft landing is a possibility”.

Fed chair Jerome Powell said in late March he still needs “more good inflation readings” and explained that he continues to expect “inflation to come down on a sometimes bumpy path to 2%”. Such is the case for other Fed officials as well, with their latest comments continuing to signal for patience and highlighting that there is no immediate urgency to cut rates.

Following March’s US Consumer Price Index (CPI) data last Wednesday, which showed sticky inflation of 0.4% month on month and 3.5% year on year (February: 0.4% m-o-m and 3.4% y-o-y), UOB has slashed its rate cut expectation from three to two for this year.

“Our view now is that the Fed will keep its current federal funds target rate (FFTR) unchanged at 5.25%-5.50% and maintain this terminal FFTR level for longer beyond June 2024, where we now price in 50bps of rate cuts for 2024 (that is, two 25bps cuts, in September and December), down from our previous projection for 75bps of cuts.

“Admittedly, the risk is still tilted for the Fed to delay cuts even further, nudged by a difficult inflation descent which, in turn, will lead to more hawkish Fed commentary,” it says in its April 11 note.

UOB had earlier raised its positive gold forecast further to US$2,300 per ounce for the second quarter, US$2,350 per ounce for the third quarter, US$2,400 per ounce for the fourth quarter and US$2,450 per ounce by the first quarter of 2025.

Economists concur that the bullish outlook on gold could face disappointment if the Fed pushes back on the timeline for its first rate cut or if the quantum of cuts is much lower than anticipated.

Following the release of the March CPI data last Wednesday, gold slipped from record high levels.

“Typically, gold longs at extreme levels are prone to corrective pullback,” says OCBC’s Wong.

The World Gold Council (WGC) in a Jan 31 report states that 2022 was a record year for the precious metal, with global central banks and other institutions purchasing an estimated 1,082 tonnes of gold, followed by the second largest purchase of 1,037 tonnes in 2023.

“As well as extending the buying trend to 14 consecutive years, the breadth of reported buying among central banks remained healthy in 2023. The vast majority of purchases continued to come from emerging market central banks, many of whom have been regular buyers in recent years,” the WGC says.

“China led the pack in 2023, adding 225 tonnes to its reserves and the momentum has continued into 2024. 

“Based on the latest available data in February, holdings were last reported at 72.58 million troy ounces,” says OCBC’s Wong.

In March, China added a further 160,000 troy ounces of gold to its reserves, for the 17th month in succession.

In February, Kazakhstan and India added six tonnes of gold to their reserves respectively, while Turkey, the Czech Republic, 

Qatar and Singapore added smaller portions to their reserves.

There were two net sellers, however, in the same month — the Central Bank of Uzbekistan reduced its gold holdings by 12 tonnes and the Central Bank of Jordan, by four tonnes.

“The buying trend that has been in place since 2010 shows little sign of abating, even if a third consecutive year of circa 1,000 tonnes in net purchases may be unlikely. This reinforces our belief that global central banks will remain net buyers again this year,” the WGC says.

Interestingly, last Monday, Zimbabwe launched its new gold-backed currency — Zimbabwe Gold — after the Zimbabwean dollar had tumbled in value over the past year, pushing the country’s inflation through the roof.

The US dollar index, which measures the greenback against six rivals, including the yen, reached a near six-month high of 105.45 on April 10, on the back of stubborn inflation data.

OCBC’s Wong sees a moderate and soft US dollar profile in the medium term as the Fed is “done tightening and should embark on a rate cut cycle in due course”.

“[However] in the near term, the uncertainty on the timing of the first Fed cut and magnitude of rate cut cycle will continue to drive two-way risks for the greenback. US data will play a key role and so far, upbeat data is supportive of the US dollar.

“More entrenched disinflation trend and the further easing of labour market tightness, activity data in the US would be required for the Fed’s hawkish rhetoric to shift and for the US dollar to trade on the back foot. Our house view still expects the Fed’s next move to be a cut,” Wong says of the factors that are setting up a favourable environment for gold.

The US dollar and gold have an inverse relationship but both have been rising since the first quarter of this year, with market analysts saying the reason for this is the flight to quality amid economic and geopolitical uncertainties.

Many economists hold the view that gold’s rapid rise since mid-February was partially driven by the potential implications that may arise from the US presidential election in 2024.

OCBC’s Wong notes that from March 2, former US president Donald Trump had won a series of nominations in Michigan, Missouri and Idaho, and that by March 6, former governor of South Carolina Nikki Haley, who was also running for president, had dropped out of the race.

“On March 13, it was confirmed that Trump had won enough delegates to be the Republican presidential nominee. The potential implication is that Trump may start a new round of trade war against China if he becomes president for the second term, and he recently spoke about plans of imposing tariff of 60% or higher on China.

“Back in 2018-2019 when the US-China trade war started and escalated, gold prices rose significantly,” Wong recalls.

“Elsewhere, ongoing armed conflicts in Israel-Hamas and Russia-Ukraine show no sign of abatement. In addition, Israel’s strike on Syria last month may have complicated matters, for fear of tit-for-tat responses,” he adds.

Experts believe only a sharp wind-down in geopolitical tensions, or the unlikelihood of an interest rate hike by the Fed, will cause demand for gold to taper.

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