During last Diwali, gold started rallying on back of expectation that Fed would start cutting rates.
Gold investors are happy this Diwali as gold has given approximately a return of around 18.5% from last Diwali till now. There were many factors contributing to the strong return in gold ranging from central bank buying to the Middle East conflict between Israel and Hamas. The main expectation for gold rally has not yet materialised which was in the form of rate cut from Fed.
During last Diwali, gold started rallying on back of expectation that Fed would start cutting rates but as inflation proved to be persistent and sticky with strong US labor force, hope of any rate cut in 2023 vanished instead paving way for rate hike in 2023.
Gold was quite resilient during the first half of the year when the US dollar was trading above 108 (on back of keeping interest rate higher for longer period) and US Treasury yield trading at 2007 highs. Normally with both US Dollar and Treasury yield soaring higher, gold would have been trading around $1850 but central bank buying and expectation of dovish monetary policy from Fed kept gold prices above $1920 for most of the year. Central banks have bought 800 tonnes in the first nine months of the year, up 14 per cent year-on-year, according to a report by the World Gold Council, an industry group. The rush to gold by central banks is also driven by countries’ desire to weaken their dependence on the US dollar as a reserve currency, after Washington weaponised the greenback in its sanctions against Russia.
Going forward, many bullish factors are in align for gold to move higher. For starters, we expect the buying from Central banks to continue which will give support to prices. US Fed has stick to its script of keeping rates higher for the bulk of 2024, but cracks have started to appear in form of soft US jobs data. Europe is already in slowdown and they may cut their rates sooner. Historically gold has given strong return after US starts cutting its rates. On average prior to 1 month of rate cuts, gold has given return of 3.44%, while 1.56% return is seen after 3 months when US Fed cuts rate.
After 6 months of cutting rates, gold has given an average of 6.29% return. So the catalyst for a multi-year rally in gold will be lower U.S. rates and a lower U. S. dollar, and the elements of that are beginning to fall into place For now, in very short term period we expect gold to consolidate and correct as it is in overbought zone and the war premium has eroded. We believe gold will not be able to match high double digit return we got from last Diwali till this Diwali of 18.5% but expect atleast return between 8 to 10% from this Diwali to next Diwali. In MCX, we expect prices to test between 65000-67000 next Diwali.
(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)
Source:financialexpress.com