2023 was a stellar year for gold. Not only did the metal hit a record high of $2,078/oz (LBMA PM) in December, but it also ended the year with an astounding 14% y-o-y increase.
However, despite gold’s record-breaking performance last year, investors remain cautious. Initially, they remained on tenterhooks waiting for cues from the US Federal Reserve on the future monetary policy path. Since the Federal Reserve kept the interest rate unchanged in its latest policy meeting and clarified that there would be no rate cut at least until March, some sanity has ensued.
This assertion by the central bank puts an end to market speculation on rate cuts in the immediate term, and that is most likely to usher in softer gold prices for the first two quarters. However, geopolitical tensions will keep the floor underneath the gold prices, keeping any major losses in check.
Geopolitical Risk
The geopolitical situation is expected to provide continuous support for gold. The effects of the Israel and Gaza conflict have now spilled over to neighbouring countries. Yemen’s Houthi rebels have been attacking the ships in the Red Sea in response to Israel’s offense in Gaza. An alleged Iranian-backed terrorist organisation attacked a US strategic base in Jordan, killing three and injuring many more. The US fired back in various parts of the region to avenge the Jordan attack. This has led to a
rise in worries about higher oil prices and the possibility of a much broader conflict in the Middle East region, boosting gold’s safe-haven appeal.
However, fundamentally, Israel is neither a supplier nor a consumption centre for gold. Drawing a parallel to the 2022 conflict, when war broke out in Europe between Russia and Ukraine, the market got nervous, fearing a supply crunch as Russia is one of the largest producers of gold in the world.
The price rise could, therefore, be argued as a more fundamental than sentiment-driven reaction. The current Middle East crisis cannot be justified with the same lens because of Israel’s negligible importance in the global gold supply chain. However, we believe that since the region is an important global trade route, sustained unrest is always a cause for concern, and hence, gold is getting constant support as a hedge against geopolitical risk.
The geopolitical situation is expected to provide continuous support for gold. The effects of the Israel and Gaza conflict have now spilled over to neighbouring countries.
Global Economy
Looking at major global economies, US inflation is looking markedly better at present than a year ago, but still staying above 3%, or relatively higher than the Federal Reserve’s long-term target of bringing it down to 2%. Based on forecast data generated by a Reuters poll, CPI is expected to hit 2.3% by the end of this year.
We expect the Federal Reserve to provide better guidance in its May policy meeting on rate cuts, but we do not expect any aggressive cuts since the US economy is doing well despite high borrowing costs. Data released by the US Labor Department showed that non-farm payroll increased by 353,000 jobs in January – almost double what was previously expected by economists in a Reuters poll. Lowering the interest rate could stoke inflation while the labour market is strong.
Meanwhile, in Asia, the Chinese economy has experienced uncomfortable turbulence. The International Monetary Fund (IMF) has predicted that the economy will grow by 4.6% this year. The Chinese housing sector, which constitutes a quarter of GDP, has been struggling with oversupply and a lack of demand. The real estate developers have an extremely high level of debt, which carries a formidable risk of collapse, drawing a parallel to last year’s collapse of Evergrande.
Mounting debt is certainly a cause for concern for the socialist government, and perhaps that has been reflected in its tightening of regulations in various sensitive sectors.
Europe is stabilising after fighting high inflation in the last few quarters. As per the data released by Eurostat, the statistical office of the European Union, GDP has grown in both the euro area and the EU by 0.1% and 0.2%, respectively, compared with the fourth quarter of 2022.
Inflation, on the other hand, has come down to 2.5%. While the economy is stabilising and inflation is cooling, it is reasonable to believe
that the European Central Bank (ECB) will look to lower the interest rate to support growth at some point in time.
Looking at major global economies, US inflation is looking markedly better at present than a year ago, but still staying above 3%, or relatively higher than the Federal Reserve’s long-term target of bringing it down to 2%.
Outlook
The current high price is certainly not favourable for the broader physical market. Although the price was high last year, we observed a rise in demand both in China and India, but that was from a low base in 2022 due to the pandemic. Meanwhile, gold withdrawal was recorded at 1,687 tonnes in SGE in 2023, and India’s imports stood at around 750 tonnes (provisionally).
We are expecting some slowdown in wholesale demand in China this year, considering the expected slowdown of the economy, while India’s demand might remain relatively stable as we estimate the rural economy will generate some disposable surpluses this year.
Elsewhere in Asia, the Middle East, and Europe, physical demand is expected to be lower year-on-year. On the other hand, gold has been supported by record central bank buying over the last two years. And although it is difficult to forecast the precise level of central bank purchases, we do expect them to be net buyers, providing relative support for the yellow metal.
Retail investment demand, which consists of bars and coins, will continue to remain sluggish, while more offloading of metal could be witnessed on the ETF front on every price rise.
We expect gold to average $1,957/oz in the first half of the year, while in the second, to average $1,990/oz.
