(Kitco News) – Gold prices are facing new headwinds from a stronger U.S. dollar and weaker Chinese demand, but the yellow metal will resume its rally once the Fed begins cutting rates, according to Ewa Manthey, Commodities Strategist at ING.
Manthey noted that gold prices have already fallen by 5% from the new all-time high above $2,450 set in May following the release of a strong U.S. jobs report and the news that China’s central bank bought no gold last month. The employment data boosted the U.S. dollar index even as the Chinese data dragged gold prices lower.
“Gold has risen almost 12% year-to-date, mostly amid optimism for a Fed pivot to monetary easing this year,” Manthey wrote. “Safe haven demand amid the conflicts in Ukraine and the Middle East, as well as buying by central banks, has also supported higher gold prices this year. However, May’s stronger-than-expected US jobs report has pushed back expectations on when the Fed may start cutting rates.”
“With inflation having remained sticky and the latest jobs numbers beating all expectations, our US economist expects the Fed to push their projections for rate cuts back, so they end up with two cuts in 2024 and four in 2025 instead of three and three,” she said.
Manthey added that if the Fed continues to delay the start of its rate-cutting cycle, gold prices could see a further pullback. “We expect gold prices to remain volatile in the coming months as the market reacts to macro drivers, tracking geopolitical events and Fed rate policy,” she said.
China also halted its sovereign gold purchases in May, ending an 18-month string of net buying, leaving their reserves unchanged at 72.80 million troy ounces. “This marked the first time the country’s central bank did not add to its reserves since October 2022,” she noted. “This has left gold vulnerable to more downside pressure.”
Manthey pointed out that China’s appetite for gold began to wane in April “when the People's Bank of China (PBoC) bought only 60,000 troy ounces, down from 160,000 ounces in March, and 390,000 ounces in February.” She said that high gold prices could continue to restrain demand in the near term.
She noted that investment demand did pick up in some regions last month, pushing global gold ETFs to post net inflows for the first time in 12 months. “During the month, Europe and Asia led global inflows while North America and other regions registered mild losses,” she said. “Global gold ETF holdings rose to 3,088 tonnes by the end of the month.”
Turning to the future outlook for the yellow metal, Manthey said ING expects gold prices to pull back slightly during the remainder of Q2. He believes geopolitical risks are already factored into current gold prices while the Fed continues to maintain high interest rates.
“We see prices averaging $2,300/oz in the second quarter and an annual average of $2,255/oz in 2024,” she concluded. “We see prices peaking in the fourth quarter, averaging $2,350/oz on the assumption that the Fed starts cutting rates in the second half of the year and the dollar and yields weaken.”
