If the stock market is in the grip of greed, then gold is tormented by doubts. The swift rally of the S&P 500 and other American stock indices is based on the belief in a soft landing of the U.S. economy and a reduction in the Federal Reserve interest rate from 5.5% to 4% in 2024. This is possible only if inflation continues to slow down and quickly reaches the target of 2%. Precious metal doubts that the path of consumer prices will be smooth.
For gold, monetary stimulus are very good news. If interest rates fall, it will reduce the cost of storing the physical asset in specialized exchange-traded funds (ETFs) and contribute to the growth of ETF reserves. So far, investors have used the decline in XAU/USD quotes to reduce their positions, not increasing holdings amid rising precious metal prices. In 2024, everything may change for the better.
Dynamics of Gold-oriented ETF Reserves
Capital inflow into the gold ETF market is an important driver of the XAU/USD rally. In 2022-2023, investment demand for precious metals left much to be desired, supported only by central bank mass purchases. I don't think their appetite will sharply diminish next year. De-dollarization against the backdrop of a strengthening multipolar world and the failures of the West will gain momentum, and gold will continue to be one of the main beneficiaries of this process.
Lower debt rates are important for gold from an investment attractiveness standpoint. Precious metals do not generate interest income, and when the yield on U.S. Treasury bonds is 5%, it loses to them. However, when rates start to fall, the share of gold in portfolios increases, and prices rise.
However, XAU/USD bulls doubt whether the Federal Reserve will follow the lead of financial markets. Will the central bank loosen monetary policy six times in 2024, as investors want? Its policy depends on data. For such aggressive monetary expansion, a quick return of inflation to the 2% target is required. On the other hand, the economy may risk overheating amid the weakening of financial conditions, which will increase the risks of a new extreme in the Personal Consumption Expenditures (PCE) and may bring the Federal Reserve back onto the path of monetary restriction.
The market will likely continue to function in a mode where bad news is good for the S&P 500 and vice versa. This means that improvements in U.S. macro statistics will indicate the U.S. economy's strength, increasing the risks of inflation acceleration and bringing back talks of a federal funds rate hike. Only weak U.S. data will allow gold to grow. The final verdict will be delivered by inflation statistics for December.
Technically, on the daily chart of the precious metal, there is a significant risk of forming a reversal pattern 1-2-3 with a double top around point 3. A drop in quotes below $2,015 per ounce is a reason to sell. To form long positions in gold, a confident assault on the resistance in the form of a cluster of pivot levels near the $2,058 mark is necessary.