Gold Monthly View for July 2024

The month of July was buoyed with rising geopolitical tensions, global uncertainty surrounding US elections and the Fed policy with respect to the timing of rate cuts given the backdrop of continuing strength in the U.S market. This confluence led to increased volatility in the precious metals initially moving up by more than ~$ 150 touching a fresh all-time peak of $2,483 per ounce, to give up some gains on back of strong GDP and weak inflation data to end July at $2,445 per ounce, still a gain of ~5% for the month. Domestic gold prices moved down by ~-2.8% due to cut in import duty of 9%. The cut in import duty propelled domestic demand along with speculation of increase in GST drove domestic prices to a premium as compared to the landed cost.

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, chair Powell’s comments were more dovish, as he reiterated that the upside risks to inflation have come down as the labor market has cooled off significantly. While recent anecdotal data have been mixed, he continues to expect a soft landing for the economy, reinforcing a rate cut probability to ~90% for the September meeting.

As we can see from July data, the US Personal Consumption Expenditures (PCE) Price Index, decreased to 2.5% y-o-y in June while Core PCE Price Index is somewhat stickier at 2.6%. Similarly, the headline US CPI declined by 0.3% from the previous month to 3.0% yoy, while the Core CPI, which excludes volatile food and energy prices, stayed sticky with an increase of 0.1% from the previous month to 3.3% yoy. The labour market seems softening to provide that wiggle room for the Fed - the Nonfarm payrolls rose by 206,000 in June, a tad lower than the average monthly gain of 220,000 over the prior 12 months, increasing the unemployment rate higher to 4.1%.

While inflation is trending low, some factors still point to some strength in the economy which could reignite inflation worries if momentum picks up. The Bureau of Economic Analysis (BEA) released its advance estimate of second-quarter GDP growth, revealing unexpected strength in the U.S. economy. Despite economists' predictions of a 2% annualized growth rate, the actual figure came in at a robust 2.8%, surpassing expectations and demonstrating resilience despite interest rates at a 23-year high.

This growth represents a significant acceleration from the first quarter's 1.4% increase, indicating a strengthening economic trajectory. The growth in the second quarter estimate was mainly due to the increases in consumer spending, private inventory investment, and non-residential fixed investment. However, the leading economic indicator like US manufacturing sector weakened further in June with the US ISM Manufacturing PMI falling to 48.5 in June, below 48.7 in May. 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.

On a 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 been ballooning thanks to rising deficits even while the economy is strengthening due to high interest expenses. The debt has surpassed $35 trillion now and shows no signs of reducing over the next few years. In Q1 2024, the total household debt rose by $184 billion to reach $17.69 trillion, while the mortgage balances increased by $190 billion to $12.44 trillion continuing their upward trajectory. 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 ~$103 from ~$105 during the month of July. While the above factors have impact on the US currency, it is a positive for precious metal gold due to its negative correlation.

Global Gold ETFs saw another month of net inflows after a losing streak since May 2023 driven by rising uncertainty and weakness in the dollar. Domestic gold ETFs on the other hand also saw inflows of 726 crores in June 2024 probably driven by investors’ need to diversify their investments.

Another Important highlight on domestic front is the latest 2024-25 Union Budget which unveiled several pro-gold policy measures, that are expected to have broad ranging implications for the local gold markets, supporting the industry's reform and fostering organized growth. The reforms include a significant cut of 9% in import duty on gold. Long-term capital gains tax on gold was adjusted down and the holding period decreased. Profits on gold ETFs will no longer be taxed at the short-term capital gains rate if held for at least 12 months and long-term capital gains tax now pares that of equities at 12.5%. According to world gold council despite some potential short-term disruptions, the combined effects of these changes to add at least 50t to gold demand in H2 2024.

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 led 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 later in the year.

Source: World Gold Council

 The Fed - July 30-31, 2024 FOMC Meeting (federalreserve.gov)

Above article is authored by Quantum.

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