Gold’s rally could extend beyond the recent record highs

Friday Investor Club: China's NPC & its pro-growth policyFriday Investor Club (11:02)
Eva Lee, Head CIO Equities Greater China, and Kathy Li, CIO Macro Strategist, join CIO’s Wayne Gordon and Daisy Tseng to dissect the takeaways from the National People's Congress.

Equities are not the only assets hitting all-time highs. Gold has been reaching record levels through this week, including an intraday high of USD 2,170 on Friday. The precious metal has now gained close to 19% since a recent low in October and almost 7% over the past month alone.

The rally over the past month has occurred despite several key headwinds for gold. While comments this week from Federal Reserve Chair Jerome Powell have rekindled some market optimism over the pace of US rate cuts, markets have broadly become more cautious about how soon and far the Fed may be able to lower borrowing costs. Markets are now implying a little over 90 basis points of easing in 2024, down from 120 basis points roughly a month ago. In addition, investors have been net sellers of gold exchange-traded funds, in favor of high-quality government bonds, where yields are elevated.

Part of the recent rally may reflect technical factors, as prices crossed key resistance levels. But while we see potential for a pullback in gold in the near term, this does not mean the rally can’t go further over the coming year. We see gold being supported by several trends:

The Fed appears on track to cut rates. This was underlined by Powell's testimony to Congress this week, at which he suggested the monetary policy committee was “not far” from being convinced that rate cuts would be appropriate. His remarks supported our base case that the Fed will ease by 75 basis points over the course of 2024, most likely starting in June. We also expect the yield on the 10-year US Treasury to fall from the current 4.07% to around 3.5% by the end of the year.

Central bank and investor buying of gold should be supportive. Swiss gold export data suggests central bank demand is likely to persist in the months ahead. This follows global central bank purchases of more than 1,000 metric tons in each of the last two years, the highest levels since the 1960s. Demand from investors in China has also been robust, possibly reflecting caution over the outlook for the equity market and property prices. Shipments of gold for January nearly doubled month-over-month to 207 metric tons, with around half these volumes exported to mainland China and Hong Kong. In addition, we expect a return in ETF buying by investors, as they look toward rate cuts from the Fed and as gold's recent momentum likely draws in further investment (albeit with a lag).

Heightened geopolitical risk should also support gold. With the US election campaign starting in earnest following the Super Tuesday primaries, political risk is likely to become a greater focus for investors. The race for the White House has the potential to aggravate tensions between the US and China, with former President Donald Trump suggesting tariffs of “more than” 60% on imports from the nation. The war between Russia and Ukraine remains fluid and unexpected turns in the conflict could contribute to volatility. That is also true of the war between Israel and Hamas, with attacks on Red Sea shipping lanes continuing.

So, we remain positive on the price of gold for 2024, and continue to recommend it as a portfolio hedge. We expect gold to trend higher to USD 2,250/oz, but would wait for price setbacks to gain exposure, even if these turn out to be modest and brief. We also continue to see gold as a good portfolio hedge against risk spikes; we recommend an allocation of around 5% in diversified and balanced USD-based portfolios. We also like select gold miners given many have lagged gold's rally, may offer appealing relative value versus the physical metal, and have the potential to generate income for investors in ways that gold cannot.