This article was published on December 4th, 2023.
In early Asia-Pacific trading on Monday, COMEX gold futures stood above the $2,150 per ounce mark, continuing to hit a record high, while spot gold short-term also soared to $2,144 per ounce, refreshing the all-time high set in May this year.
In addition to gold, other precious metals also rose: COMEX silver at $26.06 an ounce, up 0.79%, close to a six-month high, NYMEX platinum at $946, up 1.06%, close to a new high of about a year, and NYMEX palladium rose 0.55% to $1,016 an ounce.
Market analysts believe that the biggest driver behind this round of gold price breakthrough may be the bet on the Federal Reserve to cut interest rates, and other factors that push up include geopolitical factors, ultra-strong buying by global central banks, etc. Looking ahead, analysts believe that gold will still be able to maintain its rally next year, and even not only gold, the market will usher in a wave of cross-asset rallies in anticipation of the Federal Reserve's interest rate cut.
What's driving it?
Prior to this breakout, gold had been consolidating for three years, and this was the third attempt in three years to hit $2,100 an ounce. A series of recent U.S. economic data releases have been weaker than analysts expected, and inflationary pressures have continued to ease, reinforcing market expectations that the Federal Reserve has ended its interest rate hike cycle and will start cutting interest rates next year.
The ISM manufacturing index in the United States in November was 46.7, with an expectation of 47.6 and a previous value of 46.7, unchanged from October and lower than market expectations. Kaiyuan Securities said that the two major PMI systems gave a PMI lower than the boom and bust line for the U.S. manufacturing industry in November, further increasing the market's expectation that the Fed's current interest rate hike cycle has ended, and even may start to cut interest rates as soon as March 2024, so gold prices have been supported.
Kyle Rodda, a senior market analyst at Capital.com Melbourne, also said: "The market is betting heavily on the Fed to cut interest rates. And gold prices will also move higher when there are early signs of a recession. This will push the price of gold to continue to rise. ”
UBS expects gold to hit new highs in 2024 and 2025 due to Fed rate cut expectations and falling real interest rates. UBS believes that the Fed will cut rates in the first quarter of 2024, and if it pauses in December this year, this will continue to confirm the Fed's preference to cut rates around 6 months after the last increase. UBS observed the performance of gold after the Fed's previous rate hike cycles and found that gold prices tend to fall by 2% or so in the last 3 months or so after the end of previous rate hike cycles, but will rise by 7% in the next 6 months.
In addition, UBS also said that real interest rates are also a major driver of gold prices. Although the degree of correlation between the two will change over time, there is always an asymmetry in the relationship. UBS found that for every 100 basis point decline in the 10-year Treasury real rate, gold would rise by 11%, but at the same rate of gain, gold would fall by only 4.2%. Based on this, UBS believes that gold rebounds more when interest rates fall than when interest rates rise. Gold's sensitivity to real yields has declined this year relative to historical levels, but this asymmetry remains, making gold an attractive alternative outside of the bond space, and it is expected to continue to benefit if real interest rates fall in the year ahead. UBS also found that when real interest rates fall below 1.25% and continue to fall, gold prices rise even more, reaching 14%.
In addition, geopolitical factors are also pushing gold prices higher in the short term. For example, fears of further tensions in the Middle East are rapidly rising, and the resulting safe-haven buying has provided support to gold prices.
Bas Kooijman, chief executive of DHF Capital and asset manager, said the escalation "helped extend the upward trend in gold over the past two months" as the market reacted to the escalation of tensions in the Middle East. At the same time, he said that traders have also been betting on the end of the rate hike cycle and the possibility of a rate cut in the first half of next year, which could continue to support the rally in gold prices in the medium term.
In addition, global central banks are also continuing to buy gold, which also has a supporting effect on gold prices. According to data released by the World Gold Council, global central banks bought 337t of gold in the third quarter of 2023, the third highest quarterly net purchase on record, and in the first three quarters of this year, global central bank demand increased by 14% year-on-year to a record 800t.
UBS said that while these gold flows are unlikely to drive price increases on their own, they will continue to play a key role in holding the market up and supporting the overall upward trend.
Can the cross-asset rally be sustained?
In fact, the rally is by no means limited to gold. As traders widely believe that the Fed's current interest rate hike cycle is over, global stock and bond markets have also collectively soared since November. The S&P 500 rose 0.8% last week to close at its highest level since March 2022. The Dow Jones also rose sharply 2.4% last week, moving higher for the fifth straight week and its longest winning streak since late 2021. Meanwhile, the yield on the 10-year Treasury note fell to 4.225%, its lowest level since early September. The yield on the 2-year Treasury note, which is most sensitive to interest rate expectations, posted its biggest weekly drop last week since the collapse of Silicon Valley Bank in March. Bitcoin also hit $40,000 today for the first time since May 2022.
At the moment, there seems to be a consensus in the market that interest rate cuts will be the only matter of when, and how much, will be divided. If the Fed does cut interest rates as soon as March next year and then proceeds with more quantitative easing, analysts expect all assets to hit record highs.
Fed Chair Jerome Powell's recent statement that the Fed's policy setting "has penetrated deep into restrictive territory, implying tight monetary policy" is slowing economic activity, his strongest signal to date that the current rate hike cycle is over. But Powell's comments were also cautious, saying that "it is too early to confidently conclude that we have taken a sufficiently restrictive stance." But regardless of whether Powell is sending a "dovish" or "hawkish" signal, the market seems willing to interpret it as "dovish". After Powell's speech, the rally in Treasury yields lasted only a few seconds before continuing to fall. COMEX gold futures then rose to a record high on Friday.
From the perspective of the pricing of the interest rate market, at the point of interest rate cut, the market has fully priced in the Fed's interest rate cut in May next year, and the betting probability of a rate cut in March next year has exceeded 50%. In terms of the magnitude of rate cuts, the current market expectation is that the Fed will cut rates by at least 125 basis points next year, which is equivalent to five 25 basis point rate cuts, a bet that seems to have paved the way for a further decline in Treasury yields and a continued rebound in equities, bonds and commodity markets.
It is also worth mentioning that at the moment the market is not only betting on the Fed to cut interest rates. According to market participants on interest rate swap contracts, traders have fully priced in the timing of the first rate cuts by many other central banks. Specifically, the market is betting that the European Central Bank, the Bank of Canada will cut interest rates for the first time in December next year, the Federal Reserve in May next year, the Swiss National Bank and the Bank of England in June next year, the Reserve Bank of New Zealand in August next year, and the Reserve Bank of Australia in December next year.
Quincy Krosby, an analyst at LPL Financial, said: "While both the Fed's doves and hawks seem to revolve around a more 'cautious' approach to policy and acknowledge that policy is still appropriate, the market clearly disagrees. She said the market's belief that the Fed made a dovish decision in November and will begin a rate-cutting cycle by mid-2024 (or even earlier) refuted the slogan that rates are "higher and longer".
However, some institutions are worried that the "dovish" bet will be frustrated again. According to Deutsche Bank, this bet is the seventh time in this tightening cycle that market participants have bet on the Fed to turn "dovish", and the previous six have ended in failure.
Shane Oliver, head of investment strategy and chief economist at AMP, wrote in a note to clients: "The sharp rally in U.S. equities has left them technically overbought and at risk of a correction or short-term pullback." But he also admitted that "as inflation continues to ease, U.S. stocks are likely to rise further towards the end of this year and early next year," and that the seasonal tailwinds for the market will begin to show later this month.
This week, a series of economic data will test the market again, especially Friday's non-farm payrolls data. Economists polled by the media expect new nonfarm payrolls to rise to 200,000 in November from 150,000 in the previous month as workers from previous strikes return to work. The unemployment rate is expected to hold steady at 3.9%, while wage growth is expected to slow slightly to 4%.
Sources: LaiTimes