On Thursday, the commodity topped a record US$2,300 an ounce, bolstered by Jerome Powell’s assertion that the central bank will likely begin a rate cut cycle at some point this year.
In a speech delivered at Stanford Graduate School of Business on 3 April, he assured that despite higher-than-expected jobs and inflation data, the overall sentiment hasn’t changed and the Federal Reserve still expects to cut interest rates this year.
“The economy added an average of 265,000 jobs per month in the three months through February, a faster pace than we have seen since last June. And the higher inflation data over January and February were above the low readings in the second half of last year,” Powell said.
“The recent data do not, however, materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labour market, and inflation moving down toward 2 per cent on a sometimes-bumpy path.”
He added the Federal Open Market Committee (FOMC) continues to believe the policy rate is likely at its peak for this tightening cycle.
“If the economy evolves broadly as we expect, most FOMC participants see it as likely to be appropriate to begin lowering the policy rate at some point this year,” he said, without revealing a specific timeline.
Following Powell’s words of assurance, gold surged to its highest value on record, leading the market higher after a period of jitter sparked by indications of sticky inflation and stronger economic growth.
Speaking to InvestorDaily, AMP’s deputy chief economist, Diana Mousina, said the gold rally “seems to be a signal that some investors are still expecting multiple rate cuts from the Fed”. This, she pointed out, is despite market confidence in cuts falling relative to its standing six months ago.
Weeks of record highs
Notably, gold began its growth spurt prior to Powell’s latest comments, climbing 11 per cent year to date and breaking record highs multiple times through the course of March.
The initial trigger was linked to a weak ISM print in the US on 1 March, pushing bond yields down, according to the World Gold Council’s global head of research, Juan Carlos Artigas.
In a note penned on Monday, 1 April, he said: “Gold’s positive trend was further cemented following the US Federal Open Market Committee meeting on 20 March.”
At the time, he explained, market participants generally interpreted the Fed statement and Powell’s comments as dovish. This spurred growth among a number of asset classes, including gold, on the expectation that the Fed may start cutting rates in June.
“Lower rates reduce the opportunity cost for holding gold,” Artigas added.
Additionally, he highlighted other factors contributing to gold prices beyond the Fed, including a “buying spree” from central banks throughout the first months of 2024.
Central banks reported adding 64 tonnes of gold to their reserves over January and February, in what marked a four-fold increase on the first two months of 2022, but 43 per cent lower than the same period in 2023.
Moreover, gold’s strong performance over the past few years has also been linked to rising geopolitical tension with the asset class emerging as a safe haven.
According to ANZ senior commodities strategist, Daniel Hynes, while the Israeli airstrike on the Iranian embassy in Syria has been the latest incident to rock markets, escalations in the Russia-Ukraine war have also left them nervous.
“Safe haven buying as a consequence has been pretty strong,” he explained in his morning note on Thursday.
AMP’s chief economist, Shane Oliver, is less convinced that safe haven demand is behind the latest rally.
Speaking to InvestorDaily, he said: “Most measures of investor sentiment are at high levels, which is not the sort of thing you would expect if investors are looking out for a safe haven.”
For him, the influence of possibly lower interest rates holds more weight.
“Gold is highly sensitive to interest rate expectations – as interest rates determine the opportunity cost of holding gold. If rates go up, it is less insensitive and it’s more costly to hold gold, but if they go down or are expected to fall, then it provides an incentive to hold gold which is what we have been seeing this year,” said Oliver.
“Then, once gold started pushing up and breaking to record highs, it attracted more demand as some just expect recent gains to continue.”
Gold prices could face headwinds if central banks decide not to cut rates, he added, but AMP is still confident rate cuts are poised for 2024.
The path forward
According to the World Gold Council, investor flows may bring additional support for the commodity, with March delivering positive flows in physically backed gold ETFs in North America and Asia.
“Positioning in derivatives markets may bring additional investment if the gold price remains above key psychological levels such as US$2,100/oz or US$2,200/oz,” Artigas said.
“Overall, we believe that gold’s recent rally has happened while gold remains under-owned, which can create positive support if either rates fall or financial conditions deteriorate.”
JP Morgan managing director Stephen Jury also shared a constructive outlook for gold over the next 12 months.
“We currently expect that the Federal Reserve will begin to cut interest rates in the United States – likely beginning in June, subject to revision. In our opinion, this should set the stage for gold appreciation,” he said.
He, too, flagged the role of retail ETF investors, who are expected to begin accumulating gold as yields fall.
“Gold investment is not currently a crowded position. Investors have been lured by high cash interest rates – and we are particularly interested in this development. Under-owned and under-appreciated investments are often ripe for appreciation,” he said.
JP Morgan forecast gold to stand at some US$2,250–2,350 by year-end.
