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US rate cuts, central bank buying, wars seen to fuel gold to record highs

Central banks bought 800 tonnes of gold in the first nine months of 2023

Driven by expectations of imminent interest rate cuts by the Federal Reserve, gold prices are on track for their largest weekly increase in five months before hitting $2,200 in the first half and $2,300 in the second half of this year.

According to precious metals analysts, the main factors affecting gold’s price are inflation, rising demand from central banks, de-dollarisation of developing economies, microeconomic situation, and geopolitics. Other factors favouring the yellow metal’s impending historical rally are geopolitical uncertainty and the likely weakening of the dollar.

The anticipation of an impending rate cut grew following remarks by Federal Reserve Chair Jerome Powell, hinting at potential rate cuts in the near future. This has led to gold hovering near historic highs, with traders eagerly awaiting the upcoming US jobs report, analysts said.

“The combination of these factors will create conditions for the growth of gold price in 2024—in the first half of the year, the cost of the precious metal may exceed $2,200 per troy ounce. In the second half of the year, the upward trend in gold is likely to continue, and gold may show a price of $2,300 per ounce, so the average price in 2024 will be $2,170,” they said.

Ole Hansen, head of Commodities Strategy, Saxo Bank, said: “At the end of last year, we forecasted gold could reach $2300 in 2024, so while the latest rally is in line with our general view on the direction of gold, we have been left surprised by the timing of the run-up to a fresh record. Given the need for rate cuts to attract ETF investors back into gold, we have been calling for patience regarding the timing of the next move. Without any participation from ETF investors who sold nine tons last week, the rally was primarily driven by under-invested hedge funds forced back into the market as several key resistance levels broke.”

“Without a notable pickup in demand from investors in ETFs to take over from hedge funds that will soon reach their desired level of exposure, gold may hit a plateau followed by a period of nervous trading as recently established longs may reduce exposure. Overall, we maintain our $2300 target, with the technical picture potentially pointing to an even higher level around $2500,” said Hansen.

“It appears that the price of gold is poised to record a third consecutive weekly gain after reaching levels of $2170 during Friday's trading. This comes amid escalating geopolitical tensions, a decline in US Treasury yields, and increasing expectations that the Federal Reserve is approaching an interest rate cut,” said Rania Gule, market analyst at XS.com

“I believe that gold prices will strongly react to the release of the US Non-Farm Payrolls (NFP) data for February today. Strong employment figures in January, coupled with a similar performance in February and steady wage growth, may lead the Federal Reserve to monitor the data for several months before considering an interest rate cut. This scenario could provide strength to the dollar in the medium term, supporting an increase in gold prices,” said Gule.

“It is the central banks’ purchases of gold that will act as the main driver of growth in 2024," said Kar Yong Ang, the Octa financial market analyst. “If the trend continues and the level of gold reserves moves towards an average of 40 per cent of the gold composition in reserves, that would mean an additional $3.2 trillion in the asset—a 25 per cent rise in 2025, which would correspond to a price of $2,500 an ounce,” he added.

According to a World Gold Council report, central banks bought 800 tonnes of gold in the first nine months of 2023, up 14 per cent year-on-year. Excess demand from central banks has boosted the value of gold by 10 per cent in 2023.

“Considering the expected interest rate cuts, central banks’ role in the gold market, and a resilient US labour market, a cautiously bullish outlook seems reasonable for the short term. Investors might benefit from closely monitoring central bank actions and the upcoming US jobs data for further market insights,” Dubai-based bullion traders said.