Gold Monthly View for August 2024

The first half of August was buoyed with rising geopolitical tensions, global uncertainty surrounding Middle east war, Russia-Ukraine re-escalation and US elections, while the second half showed reduced uncertainty mainly with respect to the timing of rate cuts amidst a backdrop of signs of slowing inflation. This confluence led to increase in price of the precious metals initially moving up by more than ~$ 80 touching a fresh all-time peak of $2525 per ounce, to give up some gains on back of strong GDP and slowing inflation data to end August at $2503 per ounce, still a gain of ~2.4% for the month. Domestic gold prices also moved up by ~2.4% mainly due to global gold price.

The latest inflation trend as indicated through US Personal Consumption Expenditures (PCE) Price Index, Fed’s preferred gauge, showed an increase of 2.5% y-o-y in July similar to June. While Core PCE Price Index has stabilized at 2.6% since last two months. However, the headline US CPI shows a small increase of 0.2% from the previous month to 2.9% yoy. Also the Core CPI, which excludes volatile food and energy prices shows a similar increase of 0.2% from the previous month to 3.2% yoy.

Along with that the second estimate of second-quarter GDP growth data, revealed unexpected strength in the U.S. economy as the actual figure came in at a robust 3.0%, above economists' predictions of a 2.8% annualized growth rate surpassing expectations and demonstrating resilience, thanks to stronger consumer spending.

While the growth looks fine in the rear-view mirror, there are early indication of some softness creating the need for some wiggle room at the Fed. The labour market softening seems to continue, the Nonfarm payrolls rose by 114,000 in July, lower than the average monthly gain of 215,000 over the prior 12 months, increasing the unemployment rate higher to 4.3%.

Also, the leading economic indicator like US manufacturing sector weakened further with the US ISM Manufacturing PMI falling to 46.8 in July, below 48.5 in June. This creates a need for a delicate balance at the Fed and will sooner rather than later compel Fed to lean in favor of growth as policy rates remain restrictive to meaningfully impact economy.

Over the medium term, one of the factors that will adversely impact growth amidst high rates is the burgeoning interest costs on the government and the households. Government debt has surpassed $35 trillion now and shows no signs of reducing over the next few years. The continuing deficits and unsustainable debt will eventually lead to losing confidence in the dollar. This is one of the major worries besides political uncertainty to see dollar slide to ~$101 from ~$104 during the month of August. While the above factors adversely the US currency, it is positive for precious metal gold due to its positioning as an alternate / diversifier to fiat currencies.

The Fed, in its July policy announcement, kept the policy rate unchanged in the range of 5.25% to 5.5%, in line with street expectations. However, Fed chair Powell’s recent speech at Jackson hole portrayed a clear dovish narrative as he didn’t mince words to indicate a rate cut at the September meeting; “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. We will do everything we can to support a strong labor market as we make further progress toward price stability.” The recent anecdotal data have been also supported the same, reinforcing a rate cut probability to ~99% for September month with ~65% probability of 25bps cut and ~34% probability of 50 bps rate cut. We believe they would do 25 bps and not 50 bps as the higher quantum would indicate that there is something terribly wrong with the economy and they will want to manage expectations appropriately.

Global gold ETFs experienced their strongest month since April 2022, attracting US$3.7bn in July, the third consecutive monthly inflow; all regions saw inflows with western funds leading the way. Domestic gold ETFs on the other hand also saw inflows of 1337.35 crores in July 2024 mainly aided by changes announced in the recent budget which effectively shortens the long-term investment qualifying time period and lowered the associated tax rate which makes the investment landscape for gold ETFs more equitable and attractive, in addition to making gold available cheaper.

The trend of investments into gold and diversification of reserves continues. We believe this trend is likely to continue this year amid geopolitical uncertainties in middle east, elections in Europe, US and major economies, central bank buying to diversify its reserves and with continued fragmentation in world economy, would continue to support gold prices.

We have seen the ups and downs surrounding rate cuts expectations in the US before which leads to volatility in gold prices and this time is no different. However, we are closing in on the beginning of rate cuts in the US primarily driven by growth concerns and high interest costs impacting government balances. This would continue to support gold prices in addition to geopolitical worries capping downsides in gold. Any downsides in gold due to volatility in rate expectations would be an opportunity for investors to build their gold allocation. Medium term outlook for the precious metal looks promising given the imminent turn in US interest rate cycle, and confluence of macro-economic factors impacting growth, markets and hence central bank action will start supporting gold from here on.

Source: World Gold Council, Bloomberg

Above article is authored by Quantum.

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