Don’t write off gold

Since equalling its previous nominal record high of around USD2,070 per troy ounce on 4 May, gold prices have fallen. This decline has coincided with financial markets’ upward repricing of the Fed’s rate path and the resolution to the US debt ceiling issue (with both these factors helping the US dollar rebound). Higher US interest rates and a stronger dollar have led to weaker investment demand for the yellow metal.

In the short term, investment demand could remain muted because of gold’s increasing opportunity costs. Indeed, given limited signs of a meaningful decline in underlying inflation in many major economies, central banks may have to maintain an aggressive monetary stance for some time, with growing market expectations for at least one further Fed rate hike this year. Absent any significant decline in economic activity or inflationary pressure, high US interest rates may remain a drag on the gold price.

That said, our central macro scenario is for a weakening of US economic activity in H2. Furthermore, any additional rate hike by the Fed in H2 is likely to weigh even more on the real economy, thus eventually leading to an even sharper decline in policy rates than if the Fed stays pat in H2. Overall, our assumption remains that the opportunity costs of holding gold are likely to decline in 2024 (along with the US dollar). This should help lift the gold price.

In parallel, after the measures taken against Russia, fears that the West may again use sanctions against its rivals could nurture strong official demand for gold. In other words, any decline in investment demand for gold because of opportunity costs could be partially offset by strong jewellery and official demand.

Overall, muted official and investment demand could continue to put downward pressure on the gold price over the next few weeks. But in the longer term, geopolitical tensions, a less aggressive Fed and a weaker dollar all point to potential gains for gold. Our three-month projection for the gold price is USD2,000 and our 12-month projection is USD2,100.