Gold prices have seen a modest increase, rising by 0.28% to ₹76,903 per 10 grams, as markets anticipate further monetary easing by the U.S. Federal Reserve. This upward movement in gold prices reflects expectations of a potential rate cut by the Fed in its upcoming meeting, scheduled for December 17–18. Meanwhile, global demand for the precious metal has remained steady, providing additional support for prices.
Rate Cut Anticipations Drive Gold’s Price Momentum
The primary catalyst for the recent rise in gold prices is the growing expectation of a rate cut by the U.S. Federal Reserve. According to market analysts, there is a 72% probability that the Fed will implement a 25-basis-point rate cut during its December meeting. This anticipation stems from remarks made by Fed Governor Christopher Waller, who emphasized the need for continued accommodative monetary policy due to the current state of the economy. Specifically, Waller pointed to the restrictive monetary policy that has prevailed throughout much of the year, coupled with balanced labor market conditions, as key reasons for expecting further easing.
UBS, a global financial services company, has forecast an additional 100 basis points of rate cuts through 2025, following the anticipated reduction this month. These expectations of a dovish monetary policy have made gold an attractive asset for investors seeking protection against potential inflation and economic uncertainty. As a non-yielding asset, gold tends to benefit from lower interest rates, which reduce the opportunity cost of holding the precious metal.
Steady Global Demand for Gold
Despite a mixed performance in various segments of the gold market, global demand for gold has held steady. According to the World Gold Council (WGC), total gold demand in the third quarter of 2023 remained unchanged compared to the previous year, with 1,176.5 metric tons of gold purchased globally. This stable demand has been driven by increased investment activity, which has helped offset weaker demand from the jewelry sector and a reduction in central bank gold purchases.
Notably, the over-the-counter (OTC) gold market saw a significant surge, with OTC flows rising by 97% to 136.5 tons during the quarter. This suggests that institutional and private investors have increased their exposure to gold, likely driven by the anticipation of lower interest rates and continued global economic uncertainty. In a similar vein, physically-backed gold exchange-traded funds (ETFs) also experienced positive inflows, with 95 tons of gold added to such funds. This marks the first positive quarter for gold-backed ETFs since Q1 2022, underscoring renewed investor confidence in gold as a safe-haven asset.
However, not all segments of the market have seen growth. Demand for gold bars and coins declined by 9%, while jewelry demand fell by 12%, despite strong growth in India. The decline in jewelry demand can be attributed to various factors, including higher gold prices and weaker consumer spending in some regions. In particular, the Chinese market has seen a slowdown in gold consumption, which has affected overall demand for the metal.
Strong Supply Side Performance
On the supply side, gold production has been robust, with mine output reaching a record high in Q3 2023. Global mine production grew by 6% during the quarter, signaling that mining operations are continuing to ramp up as gold prices remain attractive. Additionally, gold recycling has seen a significant increase, rising by 11% compared to the previous year. This uptick in recycled gold can be attributed to the higher gold prices, which encourage individuals and businesses to sell or melt down old jewelry and scrap gold.
Despite this strong supply-side performance, the balance between supply and demand remains delicate, with fluctuations in market conditions affecting the availability of gold. Central banks, which have historically been significant purchasers of gold, have scaled back their buying activities in recent months. However, gold continues to play a central role in diversifying national reserves, and central banks in some countries are expected to re-enter the market as global economic conditions evolve.
Mixed Premiums in Physical Gold Markets
The premiums on physical gold remain varied across different markets. In India, premiums have remained stable at approximately $3 per ounce. India, as one of the largest consumers of gold globally, continues to see steady demand despite the higher gold prices. However, the situation is different in China, where gold premiums have been lower, with discounts of $19–$21 per ounce observed. This reflects subdued demand in the Chinese market, which has been affected by economic uncertainty and lower consumer confidence.
In other major gold markets, such as Singapore and Hong Kong, premiums have been mixed, ranging from $0.50 to $2.50 per ounce. These fluctuations in premiums reflect the different dynamics of regional gold markets, with demand remaining robust in certain areas while weaker in others.
Short-Covering and Price Support Levels
Gold is currently under short-covering, with open interest in gold futures contracts dropping by 0.79% to 12,277 contracts. Short-covering occurs when traders who have bet on falling gold prices are forced to buy back contracts to cover their positions as prices rise. This buying activity can add upward pressure to prices, contributing to the recent gains in the gold market.
For the time being, gold prices are finding support at ₹76,675 per 10 grams, with the next level of support pegged at ₹76,445. These levels are closely watched by traders and investors who are looking for indications of price stability. On the upside, resistance is seen at ₹77,120, with potential upward testing at ₹77,335. These levels will likely be key indicators for the next phase of gold’s price movement, with traders focusing on whether the upward momentum can be sustained in the face of global economic and monetary policy developments.
The Outlook for Gold
The outlook for gold remains positive, driven by several factors, including the continued expectation of a rate cut by the U.S. Federal Reserve, steady global demand, and a robust supply-side performance. While there are some challenges in the gold market, such as weaker jewelry demand and reduced central bank purchases, the overall picture is one of stability and potential for further growth.
Gold’s appeal as a safe-haven asset, especially amid concerns over inflation and economic instability, is likely to continue driving investment into the precious metal. Additionally, the ongoing expectation of further rate cuts from the U.S. Federal Reserve is expected to provide continued support for gold prices, as lower interest rates reduce the opportunity cost of holding non-yielding assets like gold.
For investors, gold remains a key asset class to watch, with the potential for further price appreciation as global economic conditions evolve. As we head into the final weeks of 2023, the direction of gold prices will largely depend on the outcome of the Fed’s December meeting, as well as broader macroeconomic trends. With steady demand, strong supply, and supportive monetary policies, gold looks poised to remain a critical asset in global investment portfolios.
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