By Nitesh Shah, Head of Commodities and Macroeconomic Research, WisdomTree Europe
Fed dot charts confirm three cuts and gold hits new all-time high
At 10.15pm (UK time) on 20 March 2024, just after the Federal Reserve (Fed) Open Market Committee meeting, gold reached a new intraday high of USD 2,220/oz. The Fed reiterated that three rate cuts of 25 basis points are expected this year, despite the increase in economic growth projections and, albeit marginal, in core inflation forecasts. Additionally, bond yields fell from 4.32% (just before the Fed’s announcement) to 4.27% at the end of the day. The US dollar-denominated basket depreciated from 104.1 to 103.3 in the same time frame. These are all positive factors for gold. If the Fed is making a policy mistake by sticking to its plan of three cuts (despite a rosier economy), gold should benefit further as it hedges against negative outcomes.
Investor sentiment towards gold is improving, fueling the metal’s gains
The previous all-time high of USD 2,195/oz, reached on March 8, 2024, appeared to have been driven by a sharp increase in the number of speculative long positions in gold futures markets. Although, in absolute terms, the number of long positions still remains lower than in January 2024, it is clear that institutional investor sentiment towards gold, at least in the futures market, has undergone a notable turnaround.
Source: Bloomberg, WisdomTree, March 5, 2022 – March 12, 2024. Historical performance is not indicative of future performance and any investment may decline in value.
We have yet to see a significant recovery in global exchange-traded product (ETP) flows into gold. However, according to the World Gold Council, inflows into Chinese ETPs have been recorded for three consecutive months, bringing the total assets under management of such funds to a record high of RMB 31 billion as of the end of February 2024. The increase in speculative length in futures market and demand for Chinese ETPs could boost the appetite of global institutional investors. With bonds no longer appearing so cheap compared to the second half of 2023, gold could be back in the sights of investors looking for defensive hedges.
Gold remains highly sensitive to the chances of a rate cut…
Between March 8 and March 20, gold fell slightly as the market’s belief in the June rate cut wavered. A stronger-than-expected consumer and manufacturing inflation reading for February has the market questioning whether the Fed has the support it needs to ease policy. On March 19, the chance of a rate cut in June 2024 dropped to 61%, the lowest level since November 2023.
Source: Bloomberg, WisdomTree, 3 October 2023 – 18 March 2024. Historical performance is not indicative of future performance and any investment may decline in value.
… and at the dollar exchange rate
The US dollar’s depreciation against the euro in February and early the following month certainly benefited gold, but it doesn’t explain the size of its early March gains. Until the Fed meeting on March 20, the market’s greater belief in a rate cut by the European Central Bank in June, compared to the Fed, had driven the US dollar to appreciate; the trend, however, was reversed again.
Source: Bloomberg, WisdomTree, 30 October 2023 – 18 March 2024. Historical performance is not indicative of future performance and any investment may decline in value.
The PBoC remains the largest buyer of gold
The People’s Bank of China (PBoC) announced the purchase of 12 tonnes of gold in February, recording 16 consecutive months of purchases and bringing its total reserves to over 2,257 tonnes. Over the course of 16 months, China emerged as the country whose central bank made the largest purchases of gold (for a total of 309 tons). However, with around 4.3% of total foreign exchange reserves, it holds relatively less gold than the United States (69.7%), Germany (69.0%), France (66.8%) or Russia (26 ,2%). If the country’s goal is to diversify its foreign currency assets away from those of the G7, it could continue to purchase such volumes of gold for a considerable period of time, without however reaching percentages comparable to those of the other main central banks.
Chinese retail buying shows strength
In addition to the aforementioned central bank and ETP demand for gold, retail demand in China was particularly strong in the early months of the year. The Lunar New Year period gives a seasonal boost to gold purchases in the country. The highly auspicious Year of the Dragon and its marketing campaign have made the current year an exceptional one.
Source: Shanghai Gold and Jewelery Trade Association, World Gold Council, 2021 -2024. Historical performance is not indicative of future performance and any investment may decline in value.
Strong demand has pushed up gold premiums in China. However, these fell again as the festive season ended and London prices reached a new high.
Source: Bloomberg, WisdomTree, 12 February 2010 – 19 March 2024. Historical performance is not indicative of future performance and any investment may decline in value.
Is gold overvalued?
A key question many investors ask is whether gold is overvalued. Our model indicates that gold is, in fact, largely at fair value and, if anything, marginally undervalued; the same would in fact report a gain of 12.8% on an annual basis compared to an actual gain of 12.0% (assuming a CPI inflation of 3% in March, a value that has not yet been confirmed).
