Will the gold rally continue? 

Prices are retreating from a historical high this week
Will the gold rally continue? 
Gold prices hinge on various factors, including interest rates

Gold prices surged 12 percent this year. It notably rose in recent months due to softer US economic data, which hinted at a possible peak in Fed rate hikes. This week, we are seeing a retreat of Gold prices from their historical high of around $2,130. It is a resistance zone that is of a similar extent to the rally observed in October. This shift signals market skepticism towards the excessive anticipation of Fed rate cuts, especially after Fed Chairman Jerome Powell dismissed the notion of any imminent rate cuts. He deemed them premature while opening the door to further hikes if warranted. However, markets seem to shrug off the hawkish stance, pricing in a 52 percent chance of a 25 bps rate cut in March 2024. This could translate to further weakness for the Dollar. It is especially true if upcoming US economic data disappoints and reinforces the view of a slowdown in the US economy, thereby boosting the appeal of the dollar-denominated bullion. 

Going into 2024, gold prices remain poised for a further rally. This is supported by prospects of lower rates, amid signs of an economic slowdown. Moreover, geopolitical risks and persistent inflation may drive demand for gold. Gold is often seen as a safe-haven asset andtraditional hedge against inflation. From a technical standpoint, $2,008 serves as a support zone that aligns with the lower bound of the ascending channel. It has the potential for an upward movement toward the $2,130 resistance zone. 

Lower rates prospects could boost gold prices

One of the notable themes for this year is that major central banks embarked on aggressive interest rate hikes. This is in an attempt to slay the inflation dragon. This, in turn, limited the gains in gold prices, with the decline seen from May to October. However, a recent shift in narrative is emerging. Slower economic growth and easing inflation in G7 countries are fueling expectations for the central banks to start cutting rates next year. This could benefit gold prices. Lower rates reduce the opportunity cost of holding gold, which does not generate interest. Markets are pricing around a 52 percent chance of the Fed cutting rates by 25 bps in March 2024. This could put downward pressure on the Dollar, making it cheaper to purchase the dollar-denominated bullion in foreign currencies. It further supports the gold rally. 

gold rally

Impact of weak dollar and falling yields on gold prices

The recent drop in the US CPI and increasing expectations of a rate cut have resulted in a continued weakening of the dollar and the US Treasury yields. According to FedWatch, the probability of the Fed’s rate cut in March next year has risen from 13.7 percent a month ago to 44.5 percent. In November, the dollar index experienced a decline of more than 4.30 percent. It dropped from 107.00 to 102.50. Additionally, the US 10-year Treasury yield fell below 4.20 percent for the first time since last September. This is viewed as a positive factor for the relative price increase of gold as an interest-free asset.

Read: Pros and cons: Guide to investing in gold

Geopolitical risks and rising central bank gold reserves are boosting gold demand

Since October, gold prices have consistently risen due to geopolitical risks among Middle Eastern countries and significant gold accumulation by central banks. The WGC reports that China has accumulated 181 tons of gold as of September this year, with a total of 2,192 tons of gold reserves. Additionally, 39 percent of central banks in developed countries, including the US, plan to increase their gold reserves by 16 percent over the next five years. Furthermore, gold demand in China, the world’s largest gold consumer, is expected to increase significantly. This is because of the Chinese government’s economic stimulus plan that will begin in earnest in 2024. This development adds to the optimism for the future outlook for gold.

Inki Cho and LiXingGan are financial market strategists at Exness.

About Inki Cho and LiXing Gan

Inki Cho is a financial market strategist at Exness and a CMSA (Chartered Market Security Analyst) holder. He is a licensed Financial Planner(FP) and has worked as a macro-analyst and macroeconomic reporter in various financial fields.

Li Xing is also a financial market strategist at Exness. She is a CMT and CFTe Charterholder with a proven track record in FX research. Additionally, she is part of the team recognized as a finalist for the Best FX Research at the Technical Analyst Awards for four consecutive years (2019, 2020, 2021, 2022).

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