Gold to become an attractive investment from the end of 2023 on expectations that US Fed would approach rate cuts

• Analysts say in the near term, gold prices would remain volatile at least till the rate hike cycle does not end.
• The Fed chairman Jerome Powell in February indicated that despite decrease in inflation, the central bank will continue to hike rates “a couple more” times.
• A mild recession and weaker earnings have historically been gold-positive.
• A further weakening of the dollar as inflation recedes could provide support for gold.

After gold prices slipped more than 5% in February on strong economic data that boosted expectations of more rate hikes, analysts expect prices of the precious metal to remain volatile in the near term.

Strong data from the US market included an addition of 5.17 lakh jobs in January, up from 2.33 lakh in December, even higher than what was expected. The unemployment rate in January fell to a 53-year low of 3.4%.

The Fed chairman Jerome Powell in February indicated that despite the decrease in inflation, the central bank will continue to hike rates “a couple more” times as it looks to bring down inflation even more. This eventually means gold prices would remain volatile if the Fed is done raising rates.

“The US Fed's rate hike stance will see the dollar gaining strength, eventually limiting the upside in the yellow metal,” said Prathamesh Mallya, AVP- research, non-agri commodities, and currencies at Angel One.

According to the World Gold Council (WGC), the global economy is at an inflection point after being hit by various shocks over the past year. “The interplay between inflation and central-bank intervention will be key in determining the outlook for 2023 and gold’s performance,” says the WGC.

Gold relatively better placed compared to other risk assets if growth falters

Analysts say in the near term, gold prices would remain volatile at least till the rate hike cycle does not end.

"We could see some volatility in gold prices in the near term amid the rate hike cycle. While the bulk of rate hikes by the US Fed are behind us, markets are expecting some more hikes till the middle of the year,” said Ghazal Jain, fund manager, alternative investments at Quantum AMC.

A report by Kotak Securities states that any upside surprise on the data front might prove negative for gold prices, as it might showcase resilience of the US economy and the stronger case for further rate hikes from the Fed.

A mild recession and weaker earnings have historically been gold-positive. A further weakening of the dollar as inflation recedes could provide support for gold.

Further Jain said that, in the medium to long term, the US could witness an economic slowdown or recessionary conditions, as the lagged effects of the monetary tightening show up on the economy.

“In this situation, gold will be relatively better placed than risk assets. The growth setback is expected to make the Fed cut rates either by the end of 2023 or Q1 2024. That environment will be really bullish for gold prices," added Jain.


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