Key Takeaways
- Fed expected to cut rates by 0.25 once or twice in 2024
- Geopolitical risk remains key investor concern
- Gold’s technical position leaves it highly dependent on macro developments in May
- Bank of America projects higher gold prices over the next 12 months
Gold grows in April
Gold enjoyed a very strong performance in April, reaching yet another all-time intramonth high above $2400/toz. While momentum slowed later in the month, gold still managed to post a net gain of over 4%, outperforming major equity and bond indices.
Geopolitics Remains a Support
There is little doubt that gold has found support from an intensification of geopolitical risk over the course of the last month. April saw a direct exchange of missiles between Israel and Iran, while US rhetoric against China’s support for Russia’s war on Ukraine has become more strident. Quantifying the direct impact of this on gold prices remains challenging, however, because such risk is itself very difficult to quantify and isolate from other price drivers.
In any event, surveys of institutional investors currently identify geopolitics as a significant ‘tail risk’.
This is unlikely to change soon, given the number of flashpoints already apparent.
Gold Challenged by both US Rates and US Dollar
What is certain is gold continues to show remarkable resilience in the face of some significant economic headwinds. 2024 began with the expectation that the US Federal Reserve would cut policy rates 5-6 times (1.25% – 1.50% total) over the course of the year. Such cuts were seen as a key support for non-yielding assets, which would be further reinforced by attendant US dollar weakness.
However, by the end of March, this had been scaled back to just three quarter-point cuts in the second half of 2024, as both US growth and inflation continued to surprise to the upside.
April largely saw a continuation of this trend, prompting Fed Chair Powell to comment that ‘recent data have clearly not given us greater confidence’ and ‘If higher inflation does persist …we can maintain the current level (of interest rates) for as long as needed.’ Fed funds futures now point to just 1-2 quarter point cuts this year, while the Dollar Index (DXY) has appreciated by c. 1% over the course of the month. While higher inflation is providing some offset to stubbornly high nominal rates, the net result is higher real rates which have historically been a drag on gold prices. Nevertheless, gold has performed well and is challenging traditional quantitative gold pricing models.
Technical Analysis
Gold spent much of the first part of April in overbought territory, as suggested by momentum indicators and affirmed by a subsequent decline from the all-time high of $2431/toz on 12 April. It currently appears to be consolidating around the $2320/toz level, awaiting further price action catalysts. Further support is indicated near the previous all-time high and 50-day simple moving averages ($2203/toz-$2223/toz) and Fibonacci resistance at $2359/toz.
Key Drivers in May
Resolution of gold’s technical position is likely to hinge on incoming data over the coming month. Foremost among these will be the Fed’s rate decision and subsequent press conference on 1 May. Although rates on hold are now very much priced in until September.
However, it’s possible Chairman Powell might row back on his hawkish stance considering the softer Q1 GDP print late in April and the degree to which rate markets have already moved. This would be supportive of gold. Further out, 15 May sees a raft of US inflation data for April, which will further temper the US rate outlook, given the Fed’s data dependency. Geopolitical price drivers will, as ever, remain a wildcard.
In a recent interview Michael Widmer, head of commodities research at Bank of America, said gold prices could move higher over the next 12 months if Chinese investment demand and central bank buying remain strong and western demand surges when the US Fed eventually cuts rates.
Mike is a market strategist and media commentator with 30 years of experience analysing precious metals markets. He developed his expertise working as an investment banker in emerging markets such as South Africa, Russia and Chile. His focus on precious metals was extended through subsequent work within private wealth management and his own research consultancy. During this time, he covered the gold, silver, platinum and palladium markets.
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