Gold prices have seen a 15% return year to date, compared to 13.52% in the Nifty 50 index. Gold and other precious metals start to perform as inflation starts to ease and the Fed's remarks start to soften, eventually leading to rate cuts. In recent press conferences and FOMC meetings, the Federal Reserve Governor, James Powell, has raised traders' confidence through his remarks that the central bank is done hiking rates and interest rates will remain higher for longer. Powell said "the risks of under- and over-tightening are becoming more balanced," but the Fed is not thinking about lowering rates right now.
The U.S. Federal Reserve remains the largest single driver for gold prices, with the strength of the dollar and historically high rates weighing on gold throughout much of the year. The latest US data shows inflation and the labor market are cooling, pressure from a high interest rate has started to kick in the economy, and most market participants are now pricing in a high probability of a rate cut around March–April next year as debt rollover starts to kick in, plus recession fear, etc.
Powell reiterated that it was still too early to declare that the Fed's inflation fight had finished, with prices rising 3.0% annually by the measure the central bank uses to set its target. The journey to the 2% inflation target has been stuck in a holding pattern, with core prices rising steadily for several months. This "sticky" inflation is due to an imbalance between demand and supply, with too many dollars chasing too few goods. The high saving rate has started to bottom out, and the interest rate has started to show effects across segments, including housing. However, consumer spending remains strong due to a resilient labor market, a lower mortgage rate, and a significant stimulus in the economy. The Fed's financial tightening and the related rise in mortgage rates have slowed housing activity this year, and the decline in housing prices will eventually filter into lower rents, albeit with a significant lag. The Fed is prepared to tighten policy further if it becomes appropriate to do so, but his remarks also reflected increased confidence that the current 5.25%–5.50% policy rate may well be adequate to complete the job.
Once the debt roll bomb ticks in and the economy sends signals of a slowdown, the Fed will hit the panic button and start lowering rates again, which will trigger gold to pick up momentum. During a recession, the Fed typically lowers interest rates by 200 basis points in a given fiscal year. However, market participants also believe that the Fed will not go back to its zero interest rate policy and old playbook of quantitative easing, as it would have completely hammered its reputation. Gold prices will continue to set new all-time highs in 2024 as they are boosted by a weakening U.S. dollar and Fed rate cuts.
Central bank demand is robust in emerging markets and commodity-producing nations after the Russia-Ukraine war. As the US economy starts to fade, the dollar falls, yields fall, and gold prices will reach new highs, kicking in fear of missing out (FOMO). Central banks purchased around 800 tonnes of gold over the first three quarters of 2023, 14% ahead of the same period last year, according to data from the WGC. This continued central bank buying amid stronger investment demand sets gold up to move higher through 2024.