Gold still set for all-time highs once this ‘tailwind’ kicks in, analysts say

The strong jobs data “reinforces the agreement for maintaining higher interest rates until the end of the spring,” said Rania Gule, market analyst at XS.com. Markets are pricing expectations that the Federal Reserve will keep interest rates unchanged at its policy meeting in March, Gule said.

Against that backdrop, the U.S. dollar has strengthened, with the ICE U.S. Dollar index
DXY
up 0.5% at 104.405 in Monday dealings, pressuring prices for gold, which is traded in the greenback.

Temporary setback

Data released Friday showed that the U.S. economy added a more-than-expected 353,000 new jobs in January, and the unemployment rate stayed at 3.7%, near the lowest level since the 1960s.

In an interview aired on CBS News’ “60 Minutes” on Sunday, Fed Chairman Jerome Powell said officials at the central bank are trying to pick the right point to start pulling back their restrictive policy stance and that a March rate cut is “not the most likely or base case.”

Minneapolis Fed President Neel Kashkari said Monday there is no need to quickly lower interest rates because they’re not holding down growth that much.

Gold on Monday declined, with the most-active April futures contract
GCJ24,
-0.60%

GC00,
-0.60%
down $10.80, or 0.5%, to settle at at $2,042.90 an ounce on Comex. Prices finished at their lowest since Jan. 29, FactSet data show.

Read: Why gold prices are likely to reach a record high in 2024

Any perceived weakness in gold is likely due to the fact that “regular reports on the U.S. economy and unemployment remain stronger than many commentators had predicted,” said George Milling-Stanley, chief gold strategist at State Street Global Advisors.

There are also still “no signs of the economic slowdown that many had anticipated, and…Powell continues to emphasize his message that the Fed is in no hurry to start cutting interest rates,” he told MarketWatch.

All of that has led traders and investors to dial back their expectations of when the Fed will begin reducing interest rates, he said, adding that ahead of last week’s Fed meeting, there had been strong expectations that the Fed might make its first move to reduce rates at its meeting March.

A Fed rate cut in March seems to be off the table, and hopes for a cut at the May meeting are also “dwindling,” said Milling-Stanley. Elevated interest rates are “perceived to increase the opportunity cost of investing in gold.”

Gold’s strength

However, it’s important to “not allow exaggerated expectations to cloud our thinking,” Milling-Stanley said.

“Gold prices are still very much within the range we had been expecting, and gold remains comfortably above” both its 100-day moving average of $1,983 and the 200-day moving average of $1,965, he said.

In a note last week, just ahead of last Wednesday’s Fed announcement, UBS maintained its $2,200 target for gold this year. UBS Strategist Joni Teves said that while there is much uncertainty on the timing and extent of the Fed cuts, “bottom line is that the market expects the Fed to ease policy and for U.S. rates to head lower.”

“Persistent geopolitical tensions call for diversification and gold has been one of the preferred assets in this regard,” he said. UBS doesn’t expect this to be the driver of sustained gold rally, but something that “underpins investor interest and makes gold more resilient.”

There’s also the “prospect of higher macro volatility during an unprecedented year when 4 billion people will vote in 76 elections,” said Treves. That makes the “notion of having an allocation to gold as a diversifier appealing.”

Overall, the big story that’s getting overlooked is that “we’re shifting from a rate-hiking cycle to a rate-cutting cycle,” said Brien Lundin, editor of Gold Newsletter.

Considering that gold added over $300 an ounce during what was “arguably the harshest monetary tightening in Fed history” the metal should “do even better with the tailwind of monetary accommodation,” he told MarketWatch.

Whether the pivot in policy begins in March or May will matter little by the end of this year, said Lundin.