Gold has been shining all through the year and the recent performance from the lows made on July 25 in the international as well as domestic markets and the rise in momentum upwards of around 12% approximately (on Comex as well as on the MCX) as on September 27, 2024 suggests that these asset class holds a significant importance in an investor portfolio.
Gold prices have gained momentum in past few months on account of continuous buying of gold by the global central banks, rate cuts by the US FED, and the geopolitical uncertainty in the global markets, slowdown in the Chinese economy and recent measures by the Chinese central banks to boost the economy by a spate of monetary measures.
Fed rate cut
Gold’s rally has been fuelled on account of expectations of the rate cuts in the US by the US Fed at least 3 times in 2024 as inflation has been benign and is slowly reaching the US Central Banks target zone of around 2%. Out of the expectations of three rate cuts in 2024, 50 basis rate cuts happened in the recent meeting held in September 2024 and the interest rate now stands in the range of 4.75-5%. Moreover, current projections suggest only one rate cut is pencilled in for the remainder of 2024. Gold is a non-interest bearing asset and interest rate cuts lead to weakening dollar and a weaker U.S. dollar and lower U.S. interest rates increase the appeal of non-yielding bullion. So the rally in gold prices is here to stay for the rest of 2024 and going into the new year 2025. China’s monetary stimulus signals anxiety
China’s central bank has lowered interest rates recently on September 24, 2024 by reducing RRR ( Reserve Requirement Ratio) by 50 basis points injecting liquidity into the system. This will release 1 trillion yuan ($142.5 billion) in liquidity into the banking system and was accompanied by a cut in the benchmark interest rate on seven-day reverse repurchase agreements by 20 bps to 1.50%. The September meetings are not usually a forum for discussing the economy and this suggests growing anxiety among Chinese officials. Slowdown in the Chinese economy is again a signal for global investors to boost their portfolio with the yellow metal and these monetary easing will continue in months to come indicating better returns in gold.
Next big event that will drive gold prices
With double digit gains already in the year 2024, the important event that will drive gold prices further higher will come out of a combination of events starting from interest rate cuts in the US and further interest rates trajectory in Japan along with the outcome of the US elections. With the global output to contract and the probability of the US economy in a hard landing zone, gold as an asset class is a safe bet for investors across the globe. Hopes of further interest rate cuts by the US FED, softening inflation numbers, further boosts the appeal for the yellow metal.
Although, the physical demand can take a hit due to high prices of gold, the activity of global central banks and their net purchases of gold signal that uncertainty will continue for 2024 and going in to the new year as well.
The Gold-Silver ratio, currently at 84, tends to rise during economic uncertainty or expansionary policies like rate cuts and monetary easing. A rising gold silver ratio indicates investors interest tilted for gold in comparison to silver and vice-a-versa.
The chart structure of gold prices indicates further moves higher towards the $2,800/ounce mark. Accumulation zones for gold stands at around $2300/ounce mark for long term investors. Prices on the MCX, can be accumulated at around Rs.68,000/10 gms mark for a target higher towards Rs. 78,000/10 gms mark by the end of 2024.
(The author is Deputy Vice President – Research, Non-Agri Commodities & Currencies at Angel One)
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