Gold: Long-Term Bull Case Remains Intact, but Path Higher May Prove Volatile

Following the NFP-inspired volatility, gold returned near Friday's lows by early European trade, as the US dollar index recovered somewhat against the majority of G10 currencies and bond yields pushed a little higher.

The conflicting signals from the jobs data and the ISM services PMI report that were released on Friday has created a bit of uncertainty in the markets. The macro calendar is a bit subdued this week until the release of US CPI data on Thursday.

The yellow metal may therefore remain in a holding pattern for a bit longer, and there is the potential for further short-term weakness in gold as the slightly fragile risk environment could keep the dollar supported on the dips.

However, with the Fed seen cutting interest rates a few times this year, and other central banks also likely to loosen their policies, there’s no doubt in my mind about gold’s longer-term bullish outlook.

As we proceed deeper into 2024, inflationary pressures are likely to continue to subside globally, initiating a cycle of interest rate cuts.

The European Central Bank, Bank of England, and the Federal Reserve are all expected to start this process potentially as early as the end of the first quarter, though more likely later in the year, considering the relatively less dovish stances maintained by the ECB and BoE in December.

In as far as the Fed is concerned, well it has outlined plans for three rate cuts in 2024, although the market is pricing in a couple of more rate cuts by the end of the year. The precise timing and extent of these cuts will hinge on incoming data.

Given that the boost in the price of gold in 2023 was driven in part by expectations of rate cuts in 2024, it is not unreasonable to expect the metal finding decent support once these central banks actually implement policy loosening and yields trend lower. Gold may even start a new bullish trend even before actual rate cuts, as markets tend to anticipate future developments.

There is undoubtedly significant pent-up demand for gold, given the heightened inflation experienced in recent years and the erosion of value in fiat currencies. Gold, often perceived as a true store of value, is expected to find support in the face of any substantial short-term weakness.

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Friday’s release of US activity figures added more concerns about data inconsistency than providing a clear direction for the markets. While the US labour market is certainly cooling, the slowdown is not rapid enough to prompt rate cuts in the first quarter.

This is especially true considering that wage growth remains resilient and the unemployment rate low. But those large revisions to the prior two months’ NFP data (-71K) and employment component of the ISM services report (showing a significant drop into contraction from 50.7 to 43.3) presented a contrasting narrative.

Given that the employment picture is not very clear, the dollar – and by extension, gold – should remain very sensitive to incoming data. The attention turns to the December CPI report, scheduled for release on Thursday, following a relatively quiet start to the week in terms of US data.