A new high? | Gold price predictions from J.P. Morgan Research (2024)

Fed rate cuts and the gold price forecast for 2024

Gold prices have continued to hit fresh highs in 2024 due to a wide range of factors — from escalating geopolitical risks and the interest rate outlook to budget deficit concerns, inflation hedging and central bank buying.

Gold’s blistering rally this year was partly fueled by expectations the Federal Reserve (Fed) would cut interest rates as many as three times in 2024, as stubborn inflation started to ease. But current projections suggest only one rate cut is penciled in for the remainder of 2024.

Traditionally, a weaker U.S. dollar and lower U.S. interest rates increase the appeal of non-yielding bullion. But a significant decoupling started to emerge in early 2022 and gold’s relationship with U.S. real yields has broken down even further this year.

“Gold’s resurgence has come earlier than expected, as it further decouples from real yields. We have been structurally bullish gold since the fourth quarter of 2022 and with gold prices surging past $2,400 in April, the rally has come earlier and has been much sharper than expected. It has been especially surprising given that it has coincided with Fed rate cuts being priced out and U.S. real yields moving higher due to stronger labor and inflation data in the U.S,” said Gregory Shearer, Head of Base and Precious Metals Strategy at J.P.Morgan.

Economic and geopolitical uncertainty tend to be positive drivers for gold, due to its safe-haven status and ability to remain a reliable store of value. It has low correlation with other asset classes, so can act as insurance during falling markets and times of geopolitical stress.

In addition to interest rate drivers and geopolitical concerns, data shows there has also been a reluctance by physical holders to sell gold. A general aversion to short bullion financially, despite the outsized rally, underscores gold’s structurally bullish drivers outside of U.S. real yields.

“Amid fraying geopolitics, increased sanctioning and de-dollarization, we observe an increased appetite to buy real assets including gold,” Shearer said.

With gold prices hovering around all-time highs, is another bullish run expected for the precious metal as rates begin to fall?

“Many of the structural bullish drivers of a real asset like gold — including U.S. fiscal deficit concerns, central bank reserve diversification into gold, inflationary hedging and a fraying geopolitical landscape —have lifted prices to new all-time highs this year despite a stronger U.S. dollar and higher U.S. yields, will likely remain in place regardless of the U.S. election outcome this autumn,” said Natasha Kaneva, Head of Global Commodities Strategy at J.P.Morgan. “Nonetheless, precious metals markets will be focused on any potential policy changes that could accentuate or alter one or more of these themes.”

“Across all metals, we have the highest conviction on a bullish medium-term forecast for both gold and silver over the course of 2024 and into the first half of 2025, though timing an entry will continue to be critical,” Shearer said.

Any retracement in the coming months could provide investors with an opportunity to begin positioning for further strengthening, ahead of the Fed’s planned cutting cycle.

Will gold prices hit another all-time high?

With thestrong structural bull case for gold remaining intact, J.P.Morgan has upgraded its gold price targets for this year and 2025.

Gold prices are expected to climb to $2,500/oz by the end of 2024, according to J.P.Morgan Research estimates. This prediction assumes a Fed cutting cycle commencing in November 2024, pushing gold prices to new nominal highs.

“The direction of travel is still higher over the coming quarters, forecasting an average price of $2,500/oz in the fourth quarter of 2024 and $2,600/oz in 2025, with risk still skewed toward an earlier overshoot,” Shearer said.

Gold price predictions are based on J.P.Morgan economic forecasts, which have U.S. core inflation moderating to 3.5% in 2024 and 2.6% in 2025.

The structural drivers that have helped gold’s rally so far will still remain a critical bullish driving force going forward, with J.P.Morgan economists expecting a Fed cut to come in November.

Outside of near-term mean reversion, the biggest bearish risk to the bullish gold view is a scenario where the Fed turns much more aggressive in ensuring inflation swiftly reaches its target.

“While we still think it’s a tail risk, a transition to much more hawkish Fedspeak that prompts the market to begin pricing a switch back to further hikes could drag on gold, even with the recent decoupling from yields. This could eventually set up an even larger rally if it pushes the economy toward a hard landing, but the road there would likely be a lot bumpier than our forecasts envision,” Shearer added.

Central bank buying and ETF flows to support gold demand in 2024

In addition to the imminent rate cut and rising geopolitical tensions, central banks were a major driver of gold prices in 2023 and will continue to be so in 2024.

Led by China, central banks purchased 1,037 tonnes of gold in 2023. In the same vein, 2024 has started strongly with net purchases of 290 tonnes in the first quarter — making it the fourth strongest quarter of purchases since the buying binge began in 2022, according to the World Gold Council. This also came in around 36% higher than the quarterly pace (around 213 tonnes) implied by J.P.Morgan Research’s annual estimates of 850 tonnes in 2024. The 70-tonne increase in net purchases versus the fourth quarter of 2023 is also despite a 5% quarter-on-quarter increase in the average price of gold.

“Overall, the vigorous level of central bank purchasing, as well as the continued ascent in gold prices since the end of the first quarter, has us thinking about the price sensitivity of central bank demand,” Shearer said.

As central banks are buying more gold structurally, it also appears they are becoming a bit more tactical around price.

"We think the price level of gold has minimal impact on long-term central bank acquisition plans, however, price changes do appear to influence the pace and cadence of net purchasing,” Shearer added.

China’s record gold imports might face downward pressure after the People’s Bank of China—which controls the amount of gold entering China via quotas to commercial banks—paused reported gold reserve purchases in May, ending a massive buying spree that ran for 18 months. However, central banks and other physical consumers are expected to remain strong dip buyers, supporting a higher floor in gold prices.

Along with central bank interest, increased investor appetite in the physical gold market should also be a major flow contributor to future gold rallies. Total ETF holdings in gold have fallen steadily since mid-2022, but so have London vault holdings of gold as demand from EM central banks and physical consumers have physically offset ETF outflows.

A re-lengtheningof investor ETF holdings triggered by the onset of a cutting cycle could quickly act to tighten up the physical gold market and is expected to be positive for bullion and supportive of a climb in prices in the second half of 2024

“While gold price movements may be fully decoupled from real yields and Fed pricing for now, we still think this would add an extra pillar of support later this year mainly through an eventual shift back toward retail ETF inflows, as money market funds become less attractive. Gold prices have already jumped higher even as ETF holdings have continued to sag, and a turnaround here could be quite bullish, driving another sustained leg higher in prices,” Shearer noted.