Gold Monthly View for November 2023

Recap

Some of the geopolitical premium in gold unwound in November as the situation in the Middle East remained contained and did not turn into a wider conflict. On the other hand, renewed expectations of softer Fed policy in 2024 and resulting sharp correction in US 10-year Treasury yields from 4.9% levels to 4.3% and the US dollar from 106 to 103 levels pushed up gold. Prices ended the month at $2038 per ounce, up 2.01%. Domestic gold prices touched all-time highs, ending the month up 1.89%. Risk assets also did well given the strong recovery in risk appetite.

The US economy created fewer jobs, wage growth decelerated, continuous claims for unemployment insurance rose and the unemployment rate went up in October. Cooling US labor markets reinforced expectations of a looser monetary policy. In addition, the US Treasury department lowered its borrowing estimates for the fourth quarter of 2023 pushing US Treasury yields lower.

The Fed’s Senior Loan Officer Opinion Survey showed that tight lending standards and weak demand for loans in the third quarter persisted at US banks. The US ISM Manufacturing PMI was unchanged at 46.7 in November 2023, indicating continued contraction in the manufacturing sector. The year-over-year growth rate of Industrial Production in October came in at negative 0.70%, the lowest level since February 2021. US Retail sales decreased by 0.1% month-over-month in October 2023, after six months of increases. Moody’s slashed its outlook for the US's credit rating from stable to negative, pointing to economic risks of high interest rates and ballooning government debt levels.

Meanwhile, uptick in US consumer confidence in November after three consecutive monthly declines and US government’s data revisions pointing to excess savings now lasting into 2024, suggested consumer strength.

Despite the mixed economic signals from the US economy, a growth setback in the US is looking more and more likely as cumulative effects of the Fed’s tightening show up and the US economy loses some of its tailwinds. Fixed income market’s classic recession indicator, the 10 year- 2-year Treasury yield curve continues to signal a US recession.

Outlook

There's growing consensus that the rate hiking cycle is over. The Fed is widely expected to leave rates unchanged at 5.25% to 5.50% at its December meeting. Markets are also expecting roughly 125bps of cumulative interest rate cuts by December 2024, with the first cut expected as soon as March 2024.

While we too are cautiously optimistic that the rates have peaked, rate cut expectations and this month’s move in yields are vulnerable to a reversal incase of a higher for longer Fed stance.

The rise in market-based interest rates and resulting tightening of financial conditions in the run up to the Fed’s November 1st meet possibly weighed on their decision to skip a hike. However, the skip was perceived as dovish by the markets and resulted in a sharp drawdown in yields following the Fed’s interest rate decision, effectively loosening financial conditions and making it more likely for the Fed commentary to stay hawkish in the near future.

Also, US consumer prices data for October showed a slowdown in the headline rate but stickiness in core inflation. The US economy expanded even more impressively in the third quarter than initially thought at 5.2% as per second round of preliminary estimates. This strength in prices and growth will likely keep the Federal Reserve’s bias towards more restrictive monetary policy in the very near term.

While a status quo in rates will be perceived as dovish and keep gold prices supported, hawkish Fed commentary could put a lid on prices. Further upside in gold from these levels can be expected as and when the Fed turns accommodative. A deteriorating US economic and macro landscape in 2024 is expected to accelerate this Fed pivot.

Investors can use price dips to build their gold allocation.

Data Source: Bloomberg , RBI

Above article is authored by Quantum.

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