Gold signs bright on geopolitical tensions, Fed rate cut bets spur demand

Gold’s unprecedented surge continues in April following a 10 percent rally in March, snapping three consecutive months of decline, as prospects of Fed rate cuts this year coupled with heightened geo-political tensions boost the allure for the safe haven metal. 

On April 12, COMEX Gold June futures notched a fresh record high of $2,308.8 per troy ounce, while prices on MCX was recorded Rs 69,487 per 10 gm. 

COMEX Silver prices also gained almost 10 percent in February and more than 5 percent in April so far riding the broad rally in bullions and base metals. However, the volatile metal lags gold prices due to its industrial utility and less prominent safe-haven status compared to the yellow metal. The property sector stress in China has been one of the major factors dragging silver prices.

In its March FOMC meeting, the US Fed left rates steady at a 23-year high of 5.25-5.5 percent for the fifth consecutive time and maintained its outlook for three interest rate cuts this year (against some expecting for two), suggesting that the central bank isn’t alarmed by the recent uptick in inflation. 

A recent set of economic data from the US showed signs of cooling inflation along with a slowdown in the jobs market, improving the odds of Fed rate cuts in June. Fed chair Jerome Powell recently said that the February PCE inflation was pretty much in line with their expectations and there is no hurry for rate cuts. Now, the odds of a June rate cut stand at 62 percent, according to the CME Fedwatch tool.

Gold has always been regarded as a safe haven asset, and the current geopolitical risk environment with heightened tensions in the Middle East and Europe demands for a risk premium. 

Regional tensions flared over an alleged Israeli airstrike on an Iranian embassy in Damascus, Syria, on April 1 that killed top Iranian military commanders, with Tehran saying it would respond decisively. Meanwhile, Ukraine has struck Russian energy infrastructure deep inside its territories. 

In India, a drop in jewellery demand from record-high prices might be offset by official buying. The central bank's demand for the metal remains robust in 2024 after two stellar years with a record purchase of 1,081.9 tonnes in 2022 and 1,037.4 tonnes in 2023. 

China has been amassing gold for 16 consecutive months and added 12 tonnes of the yellow metal in February, pushing its total to 2,257 tonnes roughly 4.3 percent of the country’s foreign exchange reserves.  

Gold prices gave robust returns during the past three easing cycles, (.com bubble, global financial crisis and the COVID-19 pandemic) since the early 2000s. Fed policy easing bringing down the treasury yields, and the dollar along with it, added to the shine of non-interest bearing metal. 

A Fed pivot might further boost speculative bets and ETF flows this year, with the latter negatively contributing to the demand growth for the last three years. 

Silver’s broader industrial uses and the projected supply deficit coupled with prospects of a Fed policy easing are constructive for silver prices. Factory activity from the US and China saw an expansion in March, while the global economy is expected to see a soft landing this year, improving the prospects for the industrial metal.

Having said that, the US non-farm payrolls and CPI data will be released this week and might be crucial for the yellow metal's trajectory. COMEX Gold market witnessed a historic rally and concluded the first quarter of 2024 with approximately 9 percent gains. 

More signs of easing inflation and a slowdown in the US jobs market might lead to an extended rally in the bullions with markets strengthening the wagers for first Fed rate cuts by June/July. Any upside surprise in the data might push back early rate-cut bets and prompt some profit booking after the recent rally.