Gold Q2 Fundamental Forecast: A Neutral Perspective

Gold made remarkable strides in the first quarter, breaking its previous record and surging past the $2,200 per ounce mark. This impressive rally was largely driven by investor expectations of a dovish shift in monetary policy outlook. Following a series of aggressive rate hikes in 2022 and 2023 in many developed nations, investors anticipate that the Federal Reserve and other major central banks will start easing restrictions in the coming months as economic growth and inflation ease.

With much of the anticipated transition to a more accommodative stance already factored into gold’s valuation, the potential for further upward movement may be limited going forward, particularly given the 17% increase witnessed in the past six months. For substantial gains, the Federal Reserve would need to adopt an even more dovish stance, which appears unlikely given recent guidance and mounting inflationary pressures.

Presently, investors anticipate approximately 75 basis points of easing from the Federal Open Market Committee (FOMC) in 2024. However, if the FOMC delays action due to persistent price pressures or if expectations regarding its policy trajectory shift toward a more hawkish direction, gold could face significant volatility. Generally, gold tends to benefit from lower Treasury yields and a weaker U.S. dollar, conditions often associated with the Fed lowering borrowing costs.

Beyond the Fed, geopolitical tensions, particularly those related to the Russia-Ukraine conflict, could emerge as another key driver of gold’s trajectory in the upcoming quarter. Additionally, robust physical gold purchases by central banks are expected to provide further support to the market. Central banks worldwide have been increasing their gold reserves, driven by its safe-haven qualities, stability as a store of value, and usefulness for diversification.

Although comprehensive data for 2024 is limited, January’s central bank acquisitions of 39 tonnes and projections from the World Gold Council suggest continued robust demand throughout the year. This could act as a buffer against potential losses in the event of a bearish reversal in prices.

Overall, the outlook for gold in the second quarter is neutral, with investors advised to monitor economic data, central bank communications, and geopolitical developments closely. These factors will offer valuable insights into gold’s trajectory in the coming months, with heightened volatility expected as the November U.S. presidential election approaches, potentially benefiting gold prices as a defensive investment during periods of uncertainty. However, this theme is not expected to dominate the market in the second quarter.