Gold Reaches New Record High

Gold has rallied strongly over the past week reaching a fresh intra-day record high of $2,160 per ounce on Wednesday amid expectations for interest rate cuts in the U.S. and global geo-political tensions. Gold generally attracts buyers in times of instability and given the current geo-political uncertainty, the upward momentum is likely to extend throughout 2024.

The Federal Reserve policy is likely one of the most important factors that could affect the outlook for gold prices in the months ahead. Gold does not yield any interest and higher borrowing rates are negative for the yellow metal. Expectation that the Federal Reserve will start cutting interest rates in the second half of this year as inflation gradually cools down, is seen as a tailwind for gold. When interest rates decline, gold prices typically rise as bonds become less attractive.

The price of the precious metal is likely to remain volatile in the coming months as the market reacts to macro drivers, tracking geo-political events and the Federal Reserve stance on interest rates. However, we are of the view that gold prices are likely to trade higher in 2024 as safe-haven demand is likely to support prices.

Central banks’ buying has been a pilar of support

Gold has performed quite well over the past year despite high interest rates and a strong dollar. The price of the bullion has risen from a low of $1,618 in November 2022 to a new record high of $2,160 on Wednesday. The impressive run could largely be attributed to the strong physical buying from central banks around the world and large investors positioning ahead of expected rate cuts.

Gold surged more than $110 over the past five trading sessions, driven by tepid U.S. manufacturing and construction spending, and moderate inflation. If price pressures continue to cool down, gold is likely to extend its trajectory higher.

Source: TradingView

Gold completes a technical breakout

Gold’s massive rally from the November 2022 low has been a move within a large consolidation; however, Wednesday’s breakout above its previous multiple resistance of $2,089 marks the beginning of a new uptrend. This is the first decisive breakout since August 2020 with bullish implications over the long-term. The initial upside price target based on the breakout is $2,300; however, over the long-term levels to $2,400 appear easily achievable.

Over the past four months the Relative Strength Index (RSI) has been encountering support above 40% suggesting that buying support is strong, which adds further confidence in the breakout. The price structure is constructive with the sequence of higher highs and higher lows firmly intact.

Conclusion

Gold, which is often perceived as a safe store of value in times of economic and geo-political turmoil, benefits from central bank easing policy as it triggers a decline in bond yields and the U.S. dollar, making the precious metal more attractive.

According to the CME Fed Watch Tool, markets are pricing in a 66% chance of a 25 basis point rate cut in June. Investors usually start buying gold ahead of rate cuts, since non-yielding assets, such as gold, tend to perform well in lower interest rate environment.

Although the timing and magnitude of the US central bank’s rate cut path has been unclear, the wider expectation of coming cuts has helped the yellow metal hold above the $2,000/oz level over the past four months.

While the Federal Reserve’s wait-and-see approach will likely keep volatility elevated in the near-term, as well as other economic data such as the non-farm payroll report, such volatility is likely to be short-lived, as investors buy ahead of the expected interest rate cuts, which should keep the medium-term rally in check.

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