Potential rate cuts by US Fed in 2024 to drive next rally in gold

Be prepared for volatility in first half; use corrections to build a 10-15 per cent allocation

Propelled by the banking crisis in the United States (US), the Israel-Hamas war, fears of an economic slowdown in the US in the latter half, and the belief that the bulk of rate hikes by the US Federal Reserve (Fed) were over, gold has managed to give investors a return of 12.8 per cent year-to-date (YTD) in 2023. Experts say while the initial months of 2024 could be turbulent, the yellow metal is likely to do well in the second half.

Positive drivers

US economy and Fed policy: In the past couple of months, concerns about the US economy slowing down have come to the fore, leading to the expectation that interest rates have peaked and US monetary policy will be softer going forward. Last week, in its final meeting of 2023, the Fed adopted an unexpectedly dovish stance, signalling 75 basis points (bps) of rate cuts in 2024, instead of the earlier 50 bps. Both US treasury yields (the 10-year US bond yield fell from 5 per cent to 3.8-3.9 per cent) and the dollar index (from 106 to around 102) fell, while gold surged above the $2,000 per ounce mark in the international market.

Experts say the cumulative 525 bps rate hike by the US Fed will have an impact on the economy, which will show up in 2024, leading to the next phase of the Fed’s policy. “When there is an eventual turn in Fed policy in 2024, and rate cuts begin, possibly in the second half of 2024, that is when gold’s price will move up decisively,” says Ghazal Jain, fund manager–alternative investments, Quantum Asset Management Company.

Historically, multiple rate cuts in the US have been positive for gold. “Over the past 50 years, whenever there has been a series of rate cuts in the US, gold prices have been on a positive trajectory,” says Navneet Damani, head of research, commodities & currencies, Motilal Oswal Financial Services.

He adds that while currently there are indications of three rate cuts, the dot plot could shift in the future.

Central bank buying: Central banks bought about 800 tonnes of gold in the first three quarters of 2023. Central bank demand, which has been strong in 2022 and 2023, is expected to be so in 2024 as well. “Central bank demand is being driven by the de-dollarisation trend aimed at diversifying away from the US dollar, which is getting fuelled further by the ongoing geopolitical upheavals. That should continue, keeping the dollar under pressure and helping gold,” says Jain.

Geopolitical situation: The Russia-Ukraine and the Israel-Hamas war are showing no signs of ending. The geopolitical situation will keep the downside in gold limited. “Whenever there is a flare-up, it will lead to a jump in gold’s price,” says Damani.

Physical demand: Physical demand from the leading consumers—India and China—is expected to stay healthy in 2024. While India (whose economy is doing well) will see higher consumption demand, China (whose economy is struggling) will see more of investment demand. Together, they are expected to support gold’s price.

US elections: The US has the Presidential election in 2024. “Pre-election uncertainty could also lead to movement into a safe-haven asset like gold,” says Gnanasekar Thiagarajan, director-Commtrendz Research.

Negatives for gold

Soft landing by the US economy: If the US Fed manages to pull off a soft landing for the US economy (inflation comes down without a significant setback to growth), that could lead to risky assets outperforming gold. Experts believe this is a low-probability event.

Rupee appreciation: The rupee has shown signs of appreciation in recent days. “If the rupee continues to appreciate against the dollar, that will erode the returns from gold seen in dollar terms,” says Thiagarajan.

Be prepared for volatility

The severity of the US slowdown and the timing and extent of Fed rate cuts remain uncertain. Until the first rate cut happens, be prepared for corrections in the price of gold (in the first two quarters).

Damani adds that after the run-up over the past couple of years, a period of consolidation is likely.

What should you do?

Gold will remain a relevant asset class to hold in 2024, both as a portfolio diversifier and for returns.

Existing investors: Investors who already have a 10 to 15 per cent allocation to gold should maintain it. With prices on the higher side, many investors may believe gold prices can’t move up further from these levels. “This is a fallacy, as a look at the price chart over the past 20-25 years will show. Very soon people will get accustomed to current levels and prices will move higher,” says Thiagarajan. He suggests continuing with one’s allocation.

Jain says that investors who have not built that allocation should adopt a staggered approach or buy on dips.

New investors: The current bullishness in the equity market may lead some novice investors to believe they don’t need an allocation to gold. “While the domestic growth story is looking strong and there is growth visibility, we are vulnerable to developments on the global front. Hence an allocation to gold is essential,” says Jain.