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Gold outlook amidst Fed rate cut signals

Gold outlook amidst Fed rate cut signals

After a series of increases that pushed the Fed funds rate to its highest level in over 22 years, policymakers at the Federal Open Market Committee (FOMC) have indicated the likelihood of at least three interest rate cuts in 2024.

The lingering question is: with gold prices hovering around $2000/oz, can we anticipate another surge in value for precious metals as interest rates begin to decline?

Natasha Kaneva, head of global commodity strategy at J.P. Morgan, shared insights: "Commodities are unlikely to benefit from core inflation in 2024. Inflation should decrease to below three percent, so along with a proper sense of the business cycle, these are two necessary conditions to initiate long positions, making the outlook for the sector very tactical in 2024."

She further emphasized, "For all commodities, for the second consecutive year, the only structural bullish call we maintain is gold and silver."

Economic and geopolitical uncertainty typically serve as positive drivers for gold, which is widely regarded as a safe haven due to its capacity to remain a dependable store of value.

With its low correlation to other asset classes, gold can function as insurance during market downturns and periods of geopolitical tension. Additionally, a weaker US dollar and lower interest rates in the USA enhance the appeal of the yellow metal.

Gregory Shearer, head of base and precious metals strategy at J.P. Morgan, elaborated on the outlook: "Among all metals, we have the greatest confidence in the bullish medium-term outlook for both gold and silver in 2024 and the first half of 2025, although timing the market will still be crucial."

He also noted, "At this point, gold still seems fairly yy relative to underlying interest rates and currency fundamentals and still appears vulnerable to another slight decline in the near term as expectations for Fed interest rate cuts are currently earlier than our forecasts."

According to estimates from J.P. Morgan Research, gold prices are expected to reach a peak of $2300/oz in 2025. This projection assumes that the Fed's rate-cutting cycle will initially bring cuts of 125 basis points in the second half of 2024, leading to an increase in gold prices to new nominal highs.

These estimates are grounded in Fed's official forecasts, which predict that core inflation will decrease to 2.4 percent in 2024 and 2.2 percent in 2025, before returning to 2 percent in 2026.

J.P. Morgan economists anticipate that by the second quarter of 2024, US economic growth will slow to 0.5% quarter-on-quarter. This is expected to prompt the Fed to commence interest rate cuts in June, ultimately providing cuts of 125 bps in the second half of the year to forestall a recession.

Based on these fundamental economic forecasts, 10-year US nominal yields are projected to decline by 30 bps from the forecasted 3.95% at the end of the first quarter, reaching 3.65% by the end of 2024. This would result in a decrease in 10-year real yields in the USA by the same magnitude, from 1.75% to 1.45% during the same period.

gold daily chart, forex analysis
XAU/USD daily chart, MetaTrader, 19.02.2024



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