Gold - Downgrade of gold price outlook

Between the start of the year and 4 May, gold prices rallied by 13%. Since then, they have lost momentum. Investors don’t seem eager to buy gold at current levels probably because prices are relatively close to all time high and if prices fall, the current level could not be seen for more than 5 years. Moreover, the market has priced out the possibility of the start of the easing cycle by the Fed this year. Previously, we did not hold the view of aggressive rate cuts to come in the near-term but we had expected the easing cycle to start at the end of this year.

Last week, we changed our Fed view and also our US dollar view. We now expect a recession to start in Q4 and rate cuts to come in Q1 2024. We expect the last rate hike of 25bp at the Fed’s July meeting and no rate cuts this year. We still forecast aggressive rate cuts in 2024. We now have a total of 175 basis point of rate cuts in 2024.

As a result of the change in our Fed view we have upgraded our view on the US dollar. We no longer have a rate cut for the Fed this year and fewer total rate cuts in 2023-2024. This is a positive for the US dollar. Our view is roughly in line with the market.

How does this affect our outlook for gold prices? Rate expectations (real and nominal) and the outlook for the US dollar are the most important drivers for gold prices. So we have also downgraded our gold price forecast for 2024 to 2,000 USD per ounce (from 2,200 before) We now have for 20223 and 2024 a year-end forecast of 2,000. What is the reasoning behind this? The start of monetary policy easing by Fed is generally positive for gold prices. But as the market has already anticipated this, it is already reflected in the gold price. Therefore we think that upside in gold prices versus the US dollar is rather limited from current levels. Investors hold net-long gold positions and there is a risk that part of these will be liquidated. But investors have likely bought these positions at lower levels and therefore investors may have more patience. Overall the positioning in gold is not extreme. But from risk reward point of view being long at current levels may not be attractive.