Gold prices surged in the last few months of 2023 after a powerful rally was sparked by central bank purchasing and mounting investor concern over the Israel–Hamas and Russia–Ukraine conflicts. A falling U.S. dollar and expectations of Federal Reserve (Fed) rate cuts further boosted bullion prices, which hit a record high of $2,135.39/oz in December.
After a hiking cycle that pushed the Fed funds rate to its highest in more than 22 years, policymakers on the Federal Open Market Committee (FOMC) have indicated at least three rate cuts in 2024, as inflation eases from the 40-year highs seen in mid-2022. With gold prices hovering around $2,000/oz, is another bullish run expected for the precious metal as rates begin to fall?
“Commodities are unlikely to benefit from core inflation in 2024. Inflation should fall to under 3%, so that, along with properly timing the business cycle, are the two conditions needed to initiate long positions, making the outlook for the sector very tactical in 2024,” said Natasha Kaneva, Head of Global Commodities Strategy at J.P. Morgan. “Across commodities, for the second consecutive year, the only structural bullish call we hold is for gold and silver.”
Economic and geopolitical uncertainty tend to be positive drivers for gold, which is widely seen as a safe-haven asset due to its ability to remain a reliable store of value. It has low correlation with other asset classes, so can act as insurance during falling markets and times of geopolitical stress. A weaker U.S. dollar and lower U.S. interest rates also increase the appeal of non-yielding bullion.
Anticipation has played a key role in sparking the rally in gold’s price, as it is influenced by market expectations of future Fed policy.
“Across all metals, we have the highest conviction on a bullish medium-term forecast for both gold and silver over the course of 2024 and into the first half of 2025, though timing an entry will continue to be critical,” said Gregory Shearer, Head of Base and Precious Metals Strategy at J.P. Morgan.
“At the moment, gold still appears quite rich relative to underlying rates and foreign exchange (FX) fundamentals, and still looks vulnerable to another modest retreat in the near-term, as Fed rate cut expectations are now running earlier than our forecasts,” Shearer added.
But any retracement in the coming months could provide investors with an opportunity to begin positioning for a breakout rally commencing around mid-2024, as U.S. GDP growth slows and expectations of an imminent Fed cutting cycle rise.
Gold prices will peak at $2,300/oz in 2025, according to J.P. Morgan Research estimates. This prediction assumes a Fed cutting cycle initially delivering 125 basis points (bp) of cuts over the second half of 2024, pushing gold prices to new nominal highs.
Gold price predictions are based on Fed official forecasts, which see core inflation moderating to 2.4% in 2024 and 2.2% in 2025, before returning to the 2% target in 2026.
By the second quarter of 2024, J.P. Morgan economists forecast U.S. growth will slow to 0.5% quarter-on-quarter. This should prompt the Fed to start cutting rates in June, ultimately delivering 125 bp of cuts in the latter half of the year to avoid a recession.
Based on this underlying economic outlook, U.S. 10-year nominal yields are forecasted to fall 30 bp from a 3.95% forecast at the end of the first quarter, targeting 3.65% by the end of 2024. This would pull U.S. 10-year real yields lower by the same magnitude, from 1.75% to 1.45% over the same time frame.
“We think over this period, the Fed cutting cycle and falling U.S. real yields will once again become the mono-driver behind gold’s breakout rally later in 2024. Gold’s inverse relationship to real yields has historically been weaker over Fed hiking cycles, before strengthening again as yields fall over a transition into a cutting cycle,” Shearer said.
This should ultimately drive gold prices to new nominal highs in the second half of 2024 (averaging $2,175/oz in the fourth quarter) and even higher in 2025 (quarterly average peak of $2,300/oz in the third quarter).
“The Fed cutting cycle and falling U.S. real yields will once again become the mono-driver behind gold’s breakout rally later in 2024.”
In addition to imminent rate cuts and rising geopolitical tensions, central banks were a major driver of gold prices in 2023 and will likely continue to be so in 2024.
Led by China, central banks have purchased more than a net 800 tonnes of gold in the first three quarters of 2023. J.P. Morgan Research estimates global central bank purchases for the year will hit 950 tonnes, with China remaining a significant steady buyer. This will exceed the amount purchased over the same period in 2022, which resulted in record demand.
“There is still scope for boosted reserves at some central banks as institutions look to diversify reserve assets, so purchasing is likely to remain structurally elevated compared with the late 2010s,” Shearer noted.
Along with central bank interest, increased investor appetite in the physical gold market should also be a major flow contributor to any 2024 gold rally. As of the end of 2023, managed money in net long positions — where more investors expect the price of gold to rise rather than fall — only screened at around 6/10 on a standardized scale, with 10 being the net longest positioning since 2018.
This means there is still a lot of capacity for investors, through the purchase of gold either on an exchange or via an exchange-traded fund (ETF), to increase their long positions.
Total ETF holdings in gold have fallen steadily since mid-2022, so a re-lengthening of investor positioning (exchange and ETF) triggered by the onset of a cutting cycle is expected to be positive for bullion and supportive of a rally in prices in the second half of 2024.
“As rates eventually come down, we would expect recent ETF outflows to reverse with a return to retail-led ETF inflows boosting gold investor demand too, strengthening a move higher in prices,” Shearer said. “Continued robust central bank purchases, along with boosted physical demand on price dips will likely remain a significant support to prices over the final twists and turns of the Fed cycle.”
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