Monthly gold update

Gold: Spotlight on December’s performance

Gold hit a record high in December but gave back some of those gains to end the month at $2,063¹, a month-on-month gain of 1.3%. The key driver behind the gold price this month has been the focus on the Fed’s pivot and the speed at which the Fed will cut rates. This is as speculation widens on the strength of the US economy into 2024 and the USD weakens on the prospect of an increasing number of rate cuts being priced in over the coming months.

Gold ended December at $2,063, although the metal hit a new all-time intraday high on 3 December of $2,135 as traders speculated on the Fed exercising a much looser monetary policy. These positions were quickly revised and the metal fell back below $2,000. The record high saw gold make a golden cross but also a breach of overbought levels. Gold regained its momentum with the Fed signalling its pivot on 13 December.

Although geopolitical factors faded in respect to their influence on the gold price, they do remain and there is the possibility they could increase in 2024 as the conflict in the Middle East could widen and, in the year ahead, an estimated 41% of the world’s population will see a national election. This increases the opportunity for political disruption from which gold could benefit. Gold has also benefitted from programme buying by central banks (specifically China), which has given gold a premium over real treasury yields and this looks to have continued, along with support from seasonal demand (Christmas and Lunar New Year), as total known gold holdings by ETFs is estimated to have fallen during the month.

For Q4 2023, gold increased 11.6% and delivered 13.1% for the calendar year 2023.

Keep an eye on … political tensions.

Real yields continued to fall through the month ending at 1.71%, 41 basis points lower month-on-month. Lower real yields are a fundamental support to the gold price as expectations of a slower economy are a boost to the perceived ‘safe haven’ even as expected inflation, both on 5y5y swap terms and the 10yr breakeven, fell in December.

By the end of December, softer inflation data post the Fed signalling it was now pivoting to rate cuts saw the market fully price in the Fed’s first rate cut in March 2024. This was as the Fed kept its policy rate at 5.5%. As inflation has fallen faster than anticipated by FOMC² members, it is likely that the Fed will turn its attention to the outlook for economic growth. The labour market continues to look resilient; therefore, the central scenario remains for the US to see a soft landing although this is not guaranteed. Unexpected weakness in the US economy would be a positive for the gold price.

Keep an eye on … softer-than-expected economic data, specifically US employment.

Over the course of the month, market pricing on the first Fed rate cut firmed slightly for March as the forecasted number of rate cuts for 2024 increased to six from five. This was as the Fed released a new dot plot showing it expected the Fed funds rate to be at 4.625% come the end of 2024; the previous estimate had this at 5.125%. The repricing to a softer path of US interest rates saw US dollar weakness over the month; the DXY index fell 2.1% month-on-month.

Although all major developed central banks outside of Japan saw an increase in expectation of earlier rate cuts with the common factor of weaker-than-expected inflation, markets have the greatest conviction that the Fed will cut first. This is despite the relatively better outlook for US economic growth than for the Eurozone or UK for example.

Keep an eye on … market pricing increasing the anticipated interest rate differential between the US and its peers.