Gold Monthly View for June 2024

The Fed in its June 2024 policy decision kept its key interest rate unchanged in the range of 5.25% to 5.5%, in line with street expectations. In the recent quarterly economic projections, the Fed has maintained its growth guidance from March, indicating that it sees the US economy growing at 2.1%. However, the second estimate of US GDP for the first quarter 2024 showed the economy expanded by 1.3%, notably lower from the first estimate of 1.6% y-o-y and slower than 3.4% in Q4 of 2023 mainly due to downward revisions in consumer spending, private inventory investment, and federal government spending. US manufacturing sector also weakened further in May with the US ISM Manufacturing PMI falling to 48.7, below 49.2 in April. This means that despite a slow quarter and further evidence of slowing growth, the Fed expects the economy to bounce back later in the year and hence wants to maintain rates.

Although the nonfarm payrolls data in the US rose by 272,000 in May, significantly higher than the average monthly gain of 232,000 over the prior 12 months, still keeping the unemployment rate higher at 4% (slightly above the average range of 3.7-3.9%).

There were mixed indications on the inflation front. The Personal Consumption Expenditures (PCE) Price Index, decreased to 2.6% y-o-y in May. The Core PCE Price Index also fell to 2.6%, in line with the market expectations and slowing from a 2.8% increase reported last month. However, the headline US CPI remains unchanged at 3.3% y-oy, and the Core CPI, which excludes volatile food and energy prices, stayed sticky with an increase of 0.2% from the previous month leading to 3.4% year-on-year rate.

Despite the payrolls, wages and prices rising; slowing consumption expenditure and manufacturing clubbed with unemployment inching up, it is pushing away the higher for longer Fed narrative. Expectations of a Fed rate cut have again been pushed forward with markets currently pricing a ~93% chance of a rate cut in September policy meeting, up from ~75% before the Fed policy.

The trend of diversification of reserves and investments into gold continues. As per data from the World Gold Council, the first quarter numbers highlight continued momentum of central banks gold consumption as they added 289 tonnes of gold, same as central bank gold purchases in 2023 when they totaled 1,037 tonnes for the full year - just short of the record set in 2022. Global Gold ETFs also saw net inflows after a losing streak since May 2023. Domestic gold ETFs on the other hand saw inflows of 827 crores in May 2024 probably driven by investors’ need to diversify their investments.

We believe this trend is likely to continue this year amid geopolitical uncertainties in middle east, election 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. However gold prices could remain volatile in the months ahead as the market reacts to geopolitical developments with some unwinding in geopolitical premium if there is further calm in the middle east. We saw some of this during the month of June, where gold saw a volatile movement touching as high as of $2375 and as low as $2292 as cease fire between Israel Hamas led to some colling of the geopolitical premium; closing (nearly 3% lower from the highs) at $2325 per ounce, down by ~0.1% for the month. Even domestic gold prices moved down by ~0.4% aided by a marginal depreciation in the Indian Rupee.

Medium term outlook for the precious metal looks promising given the imminent turn in US interest rate cycle. Near term, we expect gold to remain volatile and consolidate driven by expectation of sticky rates and geopolitical unwinding providing an opportunity to investors to build their gold allocation if they haven’t already as we expect downsides to be limited given other supporting factors. The election driven uncertainty and the confluence of macro-economic factors impacting growth, markets and hence central bank action will start supporting gold later in the year.

Source: US FED, WGC

Above article is authored by Quantum.

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