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Economic Jitters, US Rate Speculation Lifts Gold To Record – Reactions

Tom Burroughes Group Editor 6 December 2023

Economic Jitters, US Rate Speculation Lifts Gold To Record – Reactions

Thoughts that the US central bank might ease rates at some point next year, coupled with financial concerns – highlighted by China's sovereign debt downgrade this week – have given the "safe-haven" metal a boost.

The possibility that the US Federal Reserve might trim interest rates around mid-2024, coupled with geopolitical and global financial worries, helped to boost the price of gold over $2,100 per ounce [$2,023 December 6, 2023], up from around $1,800 a year ago.

Gold rose to all-time highs (as of late Monday) against every major currency except the Swiss franc.

That said, apart from Asian central banks and Western hedge funds playing in the yellow metal, the bullish move in gold is not a “crowded trade,” according to Adrian Ash, director of research, BullionVault, a UK-based trading platform for precious metals, said in a note yesterday. “Coin shops are glutted with customer selling, gold-backed ETFs continue to shrink, and BullionVault users sold 2.5 times as much gold as they bought as a group over the last seven days,” Ash said.

Even so, while some profit-taking among existing gold investors cautions against big rises, conditions suggest that gold has further upside, Ash said.

The prospect of lower interest rates in the US next year, and possible dollar weakening, are positive for gold – a fact cited by Pictet Asset Management in its recent asset allocation and economic briefing, as reported here.

BullionVault’s Ash agrees.

“Underlying direction looks set to keep pointing higher in 2024 as a slower economy sees central banks start cutting interest rates and geopolitics continues to support bullion prices,” Ash said. 

Jobin Tsui, gold strategist for SPDRs ETFs in Asia-Pacific at State Street Global Advisors, part of State Street, said the environment is friendly for gold. 

“In our 2024 base case outlook for gold, gold may see a potential trading range between $1,950/oz and $2,200/oz and our bull case suggests gold may see a potential trading range between $2,200/oz and $2,400/oz in 2024,” he said. 

“Gold’s trajectory in 2023 surprised many investors as the yellow metal remained resilient against traditional macroeconomic headwinds. Gold rallied past a previous all-time high set during the Covid-19 pandemic on Monday (December 4, 2023), driven by growing expectations that the Fed may need to cut interest rates in the first half of 2024,” Tsui said. “Last Friday, the US two-year treasury yields sank to their lowest level since June as markets are projecting the possibility of `higher for longer’ lasting through June 2024 down near-zero (2.9 per cent) probability.” 

“Markets are currently projecting a 43.3 per cent chance of two 25 basis point cuts by June. On the economic front, US manufacturing activities remained subdued (PMI unchanged at 46.7) in November, the 13th consecutive month that the PMI stayed below 50; US factory employment declining further as hiring slowed and layoff increased, while US consumer spending rose moderately in October. Moreover, the latest annual increase in inflation (PCE at 3 per cent year-on-year) was the smallest in more than 2.5 years, showing further signs of cooling demand that bolstered expectations [that] the Fed’s interest rate hiking cycle may be finally over.

“Global investors will continue to keep a watch on geopolitical tensions in the Middle East as Israel has resumed its military operation in Gaza, and latest US jobs data to be released this coming Friday, with non-farm payrolls expected to rise over 180,000 in November and the unemployment rate to remain at 3.9 per cent; however, stronger-than-expected payroll numbers would challenge the idea that the Fed is ready to cut rates several times in the next first half of next year.

“Looking ahead to 2024, shifting monetary policy, an economic slowdown, and elevated volatility may create a positive environment for gold. Additionally, growing demand from fundamental factors exogenous to macroeconomic variables should continue to support gold,” Tsui added.

Economic and financial news continues to highlight gold’s classic safe-haven status. Yesterday, for example, Moody’s Investor Service cut its outlook for Chinese sovereign bonds to negative from stable, reflecting global worries about debt burdens in the world’s second-largest economy. 

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