Victor Ezeja
AdminThe prices of gold have been a roll for four straight days peaking on Friday as a result of the lower-than-expected inflation readings and growing expectations that an end has come to the United States Federal Reserve’s most aggressive interest-rate hiking campaign in decades.
A normal week for markets took an extraordinary turn after the closely watched Consumer Price and Producer Price Inflation figures gave traders a nod to declare that the Federal Reserve’s fight against inflation is done and dusted.
US Producer Price Inflation cooled off in October, bucking a three-month trend that had seen the cost of energy push up prices. The Producer Price Index, which measures the average price changes that businesses pay to suppliers, fell 0.5 per cent per month. This makes it the largest monthly drop since April 2020.
Earlier in the week, Consumer Price Inflation in the United States also slumped more than expected to 3.2 per cent in October – the first decline in four months. The reading was also marginally below expectations of 3.3 per cent.
The Federal Reserve held its benchmark interest rate steady at a 22-year high earlier this month. Traders had put the likelihood of another rate hike at 30 per cent just before the PPI and CPI releases, but by Wednesday that had been priced out altogether. Instead, they moved to ratchet up the likelihood of a cut, with the prospect of a cut by March soaring from 23 per cent on Monday to 86 per cent by Wednesday’s close.
With a growing consensus that the Fed will no longer be raising interest rates – the market narrative is rapidly shifting from “higher-for-longer interest rates” to “bigger-than-expected rate cuts in 2024”. As savvy traders know – “the bigger the rate cut, the bigger the market rally”. This in itself presents, a huge bullish tailwind for the prices of Gold going into the end of the year and into 2024.
According to UBS, the Fed will start cutting rates as soon as March, on the expectation that the United States economy will slide into recession by the second quarter. This in turn will prompt the central bank to cut rates in the large increments typical of an easing cycle.
UBS forecasts the Federal Reserve will cut interest rates by 275 basis points next year, with the so-called terminal rate plunging to 1.25 per cent by early 2025.
Morgan Stanley also anticipates deeper cuts than what markets are pricing. The Wall Street bank sees rate cuts starting in June 2024, then again in September and every meeting from the fourth quarter onward, each in 25-basis point increments, according to their 2024. That will take the terminal rate down to 2.375 per cent by the end of 2025.
Meanwhile, Goldman Sachs sees the first 25-basis-point reduction in the fourth quarter of 2024, followed by one cut per quarter through mid-2026 – a total of 1.75 basis points with rates settling at a 3.5 per cent to 3.75 per cent target range.
Whichever way you look at it, one thing is clear. The case for precious metals in a well-diversified portfolio has never been more obvious than it is right now and experts and analysts wonder where the prices are heading next.
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