Gold May Hit New Highs In 2024

Gold Stays Above $2000 Despite Changes In Fed Policy Outlook

Recent inflation data and Fed’s comments have led to material changes in Fed policy outlook.

FedWatch Tool indicates that there is a 63.9% probability that Fed will leave the interest rate unchanged at the meeting in May. Traders expect that Fed will start cutting rates in June.

Not surprisingly, the changes in Fed policy outlook pushed Treasury yields away from multi-month lows. Currently, the yield of 2-year Treasuries settled near the 4.65% level, while the yield of 10-year Treasuries climbed towards 4.30%.

Rising Treasury yields are bearish for gold and other precious metals that pay no interest. Gold made an attempt to settle below the psychologically important $2000 level but this pullback was quickly bought. From a big picture point of view, gold continues to consolidate above $2000 after the test of all-time highs in December 2023. What is driving demand for gold?

Central Banks Keep Buying Gold

The recent data indicates that central banks were actively buying gold for reserves in 2023. Geopolitical uncertainty was the key driver for central bank demand.

Gold is the only reserve asset that is fully controlled by the holder, so it’s not surprising to see that central banks want to increase the share of gold in their reserves.

Importantly, gold managed to stay above the $2000 level despite outflows in gold ETFs, highlighting the strength of the core demand for gold holdings.

Most likely, rising demand for gold from central banks will be a multi-year trend. Geopolitical tensions are rising year after year, so central banks have no choice but to diversify their holdings and increase the share of gold in their portfolios.

In the near term, AI hype and strong crypto markets may serve as negative catalysts for gold markets as investors rush into riskier assets. In the second half of the year, when Fed starts cutting rates, investment demand for gold would likely increase, pushing gold towards new highs.

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