Gold has outshone equities in H1CY24. Does this rally have more legs?

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Gold has outshone equity markets in the first half of calendar year 2024, defying expectations and showcasing its resilience. Spot gold prices on the Multi Commodity Exchange surged 14%, outpacing the benchmark Nifty50 index. Globally, the yellow metal climbed nearly 13% during the period, reaching $2,380 per ounce. This rally persisted despite prolonged periods of high interest rates, underscoring gold’s status as a safe-haven asset.

In a climate of subdued global growth, risk-averse investors have sought refuge in gold. Prices also received a boost from continued central bank purchases and ongoing geopolitical uncertainties. The traction in gold exchange-traded funds (ETFs) has notably improved, with global gold ETFs experiencing inflows worth $1.4 billion in June, marking the second consecutive month of positive inflows, according to a World Gold Council report dated 9 July. Asian funds attracted a record $3 billion during the first half, indicating robust investment demand driven by higher gold prices. In contrast, North American and European funds saw significant outflows. Nonetheless, inflows seen in June and May helped limit global gold ETFs’ year-to-date losses to $6.7 billion.

Gold prices in both domestic and international markets are hovering near record highs, prompting the question: Is there more steam left in this rally? 

Apart from geopolitical tensions, the strained relationship between the US and China is expected to sustain safe-haven demand for gold in the medium term. Additionally, an interest rate cut by the US Federal Reserve could serve as a significant trigger for further price increases. As a non-interest-bearing asset, gold becomes a more attractive investment option when interest rates are lower.

While the timing of the Fed rate cut remains uncertain, optimism is growing that it might happen sooner rather than later. According to ING, last week’s poor economic data has bolstered the prospect of the Fed pivoting to monetary easing as early as September. “Swap traders are now pricing in a 75% chance of a rate cut in two months,” it said in a report dated 8 July. ING is anticipating three rate cuts this year versus the two cuts currently priced by markets.

Against this backdrop, investors should closely monitor US Fed chair Jerome Powell’s Congressional testimony and the upcoming US retail inflation data for June, set to be announced on 11 July. The next Federal Open Market Committee (FOMC) meeting is scheduled for 31 July. Additionally, movements in US bond yields and the US dollar impact gold prices.

On the flipside, a significant reduction in central bank gold purchases could dim gold’s prospects. Notably, China’s central bank did not add to its gold reserves for the second consecutive month in June. Also, declining investment demand from Asian investors could also act as a deterrent to gold’s continued rise.