Is Inflation Cooling Down Fast Enough?
The Federal Reserve responded by implementing interest rate hikes at an unprecedented pace since March 2022, aiming to curb inflation.
Price pressures and higher rates continue to be significant concerns. While inflation has shown some deceleration since June of last year, both the headline and core consumer price indexes (CPI) remain above 2%. In July, CPI accelerated to 3.2%, with annual core CPI surpassing that at 4.7%. Although inflation may be slowly weakening, the pace is indeed slow.
Furthermore, the persistence of higher interest rates is noteworthy. While inflation appears to be subsiding, it continues to coexist with elevated interest rates, which have been prevalent over the past year and a half. The Fed funds rate has been raised by 525 basis points since last March, bringing the fed-funds target range to 5.25% to 5.50% – the highest level in 22 years.
Investors Need To Understand The Complexities At Play
These circumstances demand attention and careful consideration for investors. Understanding the complexities at play is essential to make informed decisions in this challenging environment.
Considering all factors, it’s premature to declare an absolute end to this challenging phase of inflation and higher interest rates. However, it’s worth contemplating what lies ahead. Analysts increasingly suggest a more accommodating phase in monetary policy could be on the horizon.
Notably, the Federal Open Market Committee’s most recent projections, discussed at the June meeting, imply the possibility of one more rate hike this year. Yet, as time has progressed, and with easing inflation pressures, more observers are suggesting that while explicit easing may not occur this year, the era of rate hikes might be over.
Economist Thomas Simons from Jefferies, a global investment bank, highlighted that “the Fed is likely done with rate hikes for this cycle” in a recent statement.
According to CME Group’s FedWatch Tool, which assesses the probabilities of changes to the Fed funds rate, the current position aligns with these views.
Currently, the economic model indicates a 90% chance of the central bank keeping rates unchanged at the upcoming policy meeting in September. Looking further ahead, the model assigns a 60% or greater chance of the Fed funds rate remaining steady at its present level or even decreasing in the subsequent months.
Will There Be Rate Cuts?
If rate hikes are indeed over, could rate cuts be just around the corner? It’s a question worth considering.
Some of the world’s leading banking giants have expressed their views on the future of interest rates and its potential impact. Goldman Sachs anticipates a possible rate cut in the second quarter of 2024, driven by a desire to normalize the fed funds rate. Wells Fargo and Bank of America also foresee rate cuts during the same period.
These projections have sparked renewed optimism for gold prices in the coming year. Analysts are increasingly confident that 2024 holds great potential for the yellow metal. J.P. Morgan’s optimistic outlook for gold has garnered attention, but they are not alone in their expectations for a bullish market in 2024 . In fact, many analysts have shared robust forecasts for gold’s performance over the next 12 to 18 months.
Let’s now explore the perspectives of these analysts, delving into the reasons behind their predictions. While some analysts have specific price targets in mind, we will focus more on understanding the fundamental factors that contribute to their belief in gold’s shining prospects for 2024.
Gold Price Surpassing $2,100
According to analysts, several factors, including the expected shift back to accommodative monetary policy in 2024, are poised to propel gold with a significant tailwind until at least the end of next year.
Bart Melek, the Managing Director and Global Head of Commodity Strategy at TD Securities, is among those who believe that the journey toward unprecedented gold prices could commence as early as this year.
“I foresee gold surpassing $2,100 as a trading level in late 2023 or early 2024,” said Melek. “I am optimistic about gold since I anticipate the Fed deviating from its ongoing restrictive approach. I expect this change to occur prior to achieving the 2% inflation target.”
When asked about the extent to which the reinvigorated gold bull could rise above $2,100, Melek did not provide a specific target.
David Neuhauser, the Founder of Livermore Partners, an institutional asset manager specializing in alternative assets, is another analyst with a positive outlook. He predicts that gold will reach approximately $2,500 per ounce by the end of 2024, representing a nearly 30% surge from current levels.
Notably, as per TD Securities’ Bart Melek and Neuhauser, elevated inflation is expected to persist in the economic landscape despite the Federal Reserve adopting a more dovish monetary policy stance. Considering the implications of rate cuts alongside inflation above the central bank’s 2% target, the price of gold has the potential to experience a notably positive impact.
Analysts at WisdomTree, a leading exchange-traded fund (ETF) giant, are also exploring scenarios that could potentially drive the price of gold to levels witnessed in the mid-2000s.
Based on WisdomTree’s Nitesh Shah, who heads commodities and macroeconomic research in Europe, the “consensus” forecast for 2024 suggests gold prices north of $2,200 by the second quarter of next year, taking into account declining inflation, weakening dollar, and falling Treasury yields. If lingering recession fears prompt the Federal Reserve to adopt a more aggressive rate-cutting approach, David Neuhauser of Livermore projects a price of around $2,500 for gold.
United Overseas Bank’s Heng Koon How, Head of Markets in Singapore, also projects a stronger outlook for gold next year. How anticipates prices to surpass the current high by Q2 2024, albeit not reaching the levels projected by Neuhauser and Shah.
Similar to other analysts, How highlights that a significant shift in monetary policy and resulting dollar weakness will be the key drivers benefiting gold.
“One of the main contributors to our positive outlook for gold is the anticipated peak in the Fed’s rate hiking cycle, in addition to the upcoming topping out of US Dollar strength,” How recently shared with CNBC.
How also cites another reason for the optimistic outlook on metals – the consistently strong performance of ongoing gold purchases by central banks worldwide.
Despite a slowdown in gold-buying activity among central banks during the second quarter, the overall outlook for gold consumption by central banks and governments remains optimistic. As a result, the world’s central banks are likely to continue serving as a reliable source of support for the yellow metal going forward.
Central-Bank Gold Demand Expected To Remain High
The world of central banks and gold holds a fascinating relationship. While fiat currency may be the primary focus, recent evidence suggests that gold is becoming increasingly important for central banks as a means to hedge their reserves. With this trend projected to continue, central banks could potentially play a more significant role in driving gold prices in the near future.
In the economically volatile year of 2022, central banks worldwide became net purchasers of 1,136 metric tons of gold, marking the highest annual total on record. This impressive demand for gold by central banks has persisted for the past 13 years, indicating a potential long-term embrace of gold.
Even in the face of quarter-to-quarter and year-over-year drops in gold demand during the second quarter, central banks accumulated more gold in the first half of 2023 than in any previous year since 2000.
This macro trend of accumulating gold is expected to keep gaining momentum. According to the 2023 Central Bank Gold Reserves Survey by the World Gold Council, 70% of central banks surveyed anticipate a rise in global gold reserves over the next 12 months.
Moreover, a survey conducted by asset manager Invesco reveals that the coming years will likely witness an increased focus on gold by central banks and sovereign wealth funds. Over 40% of respondents indicated their plans to increase their allocations to gold in the next three years.
The growing importance of gold is further highlighted by the fact that nearly 70% of respondents stated their preference for keeping their metals assets within national borders. This signifies a substantial increase compared to the figures of three years ago.
The relationship between central banks and gold continues to evolve, and it is clear that this precious metal holds significant informational and engaging value for investors and financial enthusiasts alike.
It’s hard to say for sure whether central banks will continue their strong demand for gold. However, even if they don’t sustain record levels of gold demand, there is evidence to suggest that central banks could still have a significant impact on the rise of gold prices in the coming year. Investors should keep an eye on this potential opportunity.
