IAUM - Why Gold Could Hit An All-Time High By The First Half Of 2024
2023-11-21 03:58:00 ET
Summary
- Why gold prices could hit new highs in 2024.
- What coming rates cuts could mean for gold.
- Has US economic growth peaked? Implications for gold.
The price of gold has been benefiting from expectations the U.S. Federal Reserve may be done hiking interest rates. Daniel Ghali, Senior Commodity Strategist at TD Securities, explains why the precious metal could be on its way to an all-time high in coming quarters.
Transcript
Greg Bonnell: Well, the price of gold has been benefiting from this week's US inflation data that came in tamer than expected. You can take a look at the last six months. And it has been on the upward bounce. Of course, the precious metal has been under pressure after hitting that $2,000 mark at the end of October. But my next guest says we could see gold trading at a new all-time high by the first half of 2024. Daniel Ghali is Senior Commodity Strategist at TD Securities. Daniel, great to have you back on the program.
Daniel Ghali: Yeah, thanks for having me back.
Greg Bonnell: All right. So if we lay out a new all-time high in the first half of next year, that's where we got to start. How high could it go? And what would actually drive gold to those levels?
Daniel Ghali: Well, listen, we're looking at gold prices rallying towards $2,100 an ounce. That's on an average quarterly basis. So on a more tactical horizon, that can overshoot quite substantially. And really, what we're looking at here is a significant undervaluation of every macroeconomic scenario other than a soft landing.
We're actually expecting a US recession in the first half of next year. We're starting to see cracks emerge in the data. And investors are very severely under-positioned for that in gold markets. That's particularly notable, by the way, in a period in time when you have stock-bond correlations that are abnormally high. The traditional portfolio diversifiers that people tend to look at are no longer working as well. So commodities are one angle that you can take a look at to address that.
Greg Bonnell: You mentioned the US economy there. Obviously, you said the only thing that the market's really pricing in is a soft landing where we all come out of this unscathed. And we've been through a lot in the past couple of years. So if you think we're going to see a recession, then that would suggest that the US economy has peaked. It's been pretty strong up to this point. What does that mean for gold prices longer term? What are the correlations here?
Daniel Ghali: Yeah, so I mean, the third quarter GDP report was gangbusters. And I think that intuitively, market participants have seen the trend growth that has occurred over the last few quarters and are starting to project that forward. But the reality is the quality of that GDP report was actually pretty poor. And we think that we've already reached peak US data.
Looking forward, we're expecting a meaningful deterioration in the growth outlook starting in the fourth quarter but continuing into the first half of next year. And we think the market is already comfortable with the idea of the Fed providing insurance cuts. But as the recession outlook firms, that's going to have to firm further as well. The Fed is going to have to cut far more than the market is currently expecting.
Greg Bonnell: You said the word "cuts" there twice. That is what a lot of people have been asking about, about when they will come. Not only are we done-- and I mean, it appears if the Fed doesn't go higher again, we've been done for a while. We haven't seen a hike in quite a few months. At the same time, though, when the cuts come-- let's first ask you when you think they might come. I mean, if the condition is a recession, when does the Fed feel the need to act?
Daniel Ghali: So this is the hard part for people to wrap their heads around. Chair Powell has already communicated the idea that the FOMC is actually comfortable with the idea of looking at the Fed funds rate in a real basis. So if the Fed actually just keeps nominal rates constant, and inflation is coming down over the first half of next year, you actually expect the real Fed funds rate to increase notably.
That's actually the Fed tightening significantly over that period of time, which is not necessarily necessary when growth is already deteriorating, when inflation is actually getting closer and closer to target every month. So the idea of insurance cuts has already been communicated. But if there is indeed a recession, as we expect, we think the market is going to price a significantly deeper cutting cycle.
Greg Bonnell: Let's talk about the cutting cycle. When the cut does come, the idea that if we were going to see, I guess, heading into this rate hiking cycle, people say, well, generally central banks, they move in 25-basis point increments. They take it slow. They don't want to shock the economy. Inflation got out of hand. They had to shock the economy. And it was pretty aggressive and a pretty short part of time. Once they feel like the mission has been accomplished, or even a recession has arrived, how aggressive could they be to the downside?
Daniel Ghali: Well, so central bankers tend to look at data as it comes in. So by the very nature of that, they're going to be behind the curve when it comes to the growth outlook. They need to see actual weakening in the data before they cut. The result of that is the economic deterioration that we'll see between those moments in time is going to accelerate. And that's probably going to necessitate more aggressive cuts.
Greg Bonnell: And then once we're actually in that place, gold. This is where you see the thesis playing out, right? Hitting new all-time highs.
Daniel Ghali: Yeah, absolutely. I mean, so what's interesting about gold markets is that the upside we've seen in interest rates tends to be pretty negative for gold prices. But gold prices today are actually still hovering. If you zoom out, they're still hovering near all-time highs.
So the deterioration of that relationship actually points to very significant central bank demand that has distorted that relationship, given that it's largely investors that tend to look at interest rates and that filters through to the capital that flows through to gold.
Central banks don't tend to look at it that way. And in fact, we think that this is a structural trend driven by a mind shift in the Global South where central banks from -- everywhere from China to the Middle East, Turkey, and so on and so forth are looking to add gold to their FX reserves. So bringing that back to the context here is if central bank demand remains as firm as it has been or just generally strong, and investor demand kicks in on a lower interest rate outlook, then the outlook for gold tends to be quite positive.
Greg Bonnell: I only got about a minute left with you, Daniel. But while I got you in the chair, I got to ask you about liquid gold, about oil, what we've been seeing in the market right now and where we might be headed.
Daniel Ghali: Yeah, so oil prices have been coming under a significant amount of pressure. But we actually expect them to remain largely range-bound at elevated prices over the next year. We're forecasting oil prices north of $90 a barrel. And the story here is a supply-side story. Contrary to what we've experienced last year, where you had structural constraints to supply, this year is a story about an engineered tightening in oil markets.
This has to do with the aggressive production curtailment deal from OPEC+ and its partners, Saudi Arabia and Russia's voluntary commitment to cut their supply even further, which we expect is going to persist over the course of the first half of next year at the very least.
They are now stuck in a position where because oil prices are under pressure, if they were to abandon the deal as is planned at the turn of the year, oil prices would deteriorate significantly. And that would be counterproductive to the efforts that have been ongoing for almost six months now.
So they're stuck in a position where they need to keep supply tight. They're also now embracing the role of swing producer, given that investment into new supply has been curtailed in the West. And in turn, they now have a dominant share of global spare capacity.
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Why Gold Could Hit An All-Time High By The First Half Of 2024