Gold prices forecast to sustain

KUALA LUMPUR: The strong January inflation reading in the United States led to a correction in spot gold prices to below US$2,000 an ounce last week, but analysts believe the price of the yellow metal may still find continued support at these levels.

However, near-term volatility will persist driven by geopolitics and economic data.

While gold is down some 2% since the start of the year, the demand picture for the precious metal continues to remain solid from the continued geopolitical risk which may endear the commodity worldwide. This is given its safe-haven status and as an alternative to the mighty US dollar.

There are also some expectations in the market that this year may see even higher prices for the commodity, especially if demand continues to grow. Unsurprisingly then, spot gold closed at US$2,012 last week.

Despite its high price, gold continues to be purchased by central banks around the world due to de-dollarisation moves as well.

According to the World Gold Council, the central bank buying streak continued last year from 2022 at a blistering rate.

Demand reached 1,037 tonnes last year, making it the second highest on record, down just 45 tonnes in the previous year.

That said, upside to its price is facing near-term headwinds.

Gold spot prices saw a sharp fall to a two-month low, and below the US$2,000-an-ounce psychological support level, at US$1,991 an ounce last week following expectations that interest rates in the United States will likely stay elevated for a longer time after inflation data for January came in stronger than forecast, triggering higher treasury yields and a stronger US dollar.

Higher US Treasury yields sap demand for the yellow metal. Inflation data in the United States released last Wednesday showed the metric had risen more than initially expected in January.

The consumer price index (CPI) rose 0.3% in January and on a 12-month basis, this came out to 3.1%, which is a reduction from 3.4% in December.

“The inflation data, the surge in yields, and the corresponding rise in the US dollar threw the gold market in a loop.

“Investors were bidding time for the Federal Reserve (Fed) to cut rates. But we were caught wrong-footed with the market paring back rate cut expectations,” SPI Asset Management’s managing partner Stephen Innes told StarBiz.

“The primary gold demand has come from emerging markets, particularly physical demand in China.

“That hasn’t changed too much, but it will be interesting to see if the price drop encourages more buying over the Golden Week or if it dries up.

“If it is the latter, then the excess supply will return to international markets such as Singapore-Bangkok and London, which puts additional pressure on gold,” he added.

Innes thinks gold will find fresh demand from the US$1,965 to US$1,975 levels unless yields fall and exchange-traded fund (ETF) demand returns – in an ideal situation both factors must happen together.

“If so, gold could struggle to push above US$2,025 to US$2,050 in the first half of 2024.

“The second half should be a different story for gold when, assuredly, US economic data weakens, and the Fed cuts (rates) and the dollar falls.

“However, if the Fed does manage to engineer a soft landing even with falling yields and the dollar softer, it’s unlikely gold will trade above the 2023 highs,” he said.

“We are very neutral and hedged on gold at the moment, and we think we need to see a breakout above US$2,050 to US$2,075 to make things attractive for the ETF crowd,” Innes added.

The strong January CPI data has led the timing of the first Fed cut being pushed out to June, while the magnitude of the cut for 2024 has been reduced to 100 basis points (bps) versus the 150-bps cut forecast by markets at the start of the year.

OCBC Research said the trajectory in the CPI data may and will encounter some speedbumps along the way.

“We caution against extrapolating the January data as some residual seasonality effects remain.

“And to put things in perspective, disinflation is never a single straight line.

“The bump-up in the core services reading is worth monitoring further, but it is also key to point out that it was due to more volatile items such as airfares and hotels as well as shelter,” it stated in its recent monthly commodity report.

The research house believes the focus is still Fed’s preferred measure - the personal consumption expenditures (PCE) core print which will be due at the end of this month.

That indicator will not capture the volatile items such as airfares, hotels, and places much lesser weight on shelter as the CPI index does.

“The last reading on the PCE core at 2.6% was closer to Fed’s 2% target – an indication that disinflation trend remains intact while labour market tightness is also starting to ease gradually. The expectations on the timing of first fed cut and magnitude of cut will continue to drive volatility in gold prices in the interim,” OCBC Research noted.

It remains bullish on gold and forecast gold price to trade hit US$2,065 by the end of the first quarter (1Q24) and keep rising to US$2,140 by the 4Q24.

Meanwhile, the World Gold Council’s senior market analyst Louise Street noted in a release at the end of last month of the unwavering demand for gold by central banks last year.

“This has been supportive of gold demand and helped offset weakness in other areas of the market, keeping 2023 demand well above the ten-year moving average,” Street said.

“In addition to monetary policy, geopolitical uncertainty is often a key driver of gold demand and in 2024 we expect this to have a pronounced impact on the market. Ongoing conflicts, trade tensions and over 60 elections taking place around the world, are likely to encourage investors to turn to gold for its proven track-record as a safe haven asset,” he added.

Street noted central banks often cite gold’s performance in times of crisis as a reason to buy, which suggests demand from this sector will stay high this year.

“Their continued buying may help to offset a slowdown in consumer demand due to elevated gold prices and slowing economic growth,” he said.

From a technically analysis perspective, in its recent report RHB Research had a bearish view on gold namely on COMEX Gold, advising traders to maintain their short positions.

“For the immediate term, the COMEX Gold’s price may attempt to build an interim base near the US$2,000 level. However, in a bearish setup, such support will be weak. On the upside, both the 20- and 50-day simple moving average (SMA) lines are now acting as resistance levels,” RHB Research said in a report yesterday.

“These SMA lines are trending lower, giving downwards pressure on the commodity’s

price. Premised on the technical structure that is bearish, we hold on to our negative trading bias,” it added.

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