The Federal Reserve's interest rate cut is delayed? Gold prices fell by 1.25% in response! Domestic gold prices rose by 15% this year, or continue to go bull

International gold prices have outperformed commodities, bonds and most equity markets this year, outperforming expectations in a high interest rate environment. In the domestic market, gold prices in Shanghai have risen by 15% this year.

As of December 8, the US non-farm payrolls report for November challenged the view that the US will cut interest rates quickly next year. The dollar index strengthened, while the price of gold fell 1.25%. As the market corrects overly optimistic expectations for the Federal Reserve to cut interest rates, market analysts predict that gold will have a better opportunity to intervene.

Interest rate cut expectations delayed? Gold prices fell 1.25%

On December 8, US time, the United States released the non-farm payrolls report that was considered to be strong in November. The data showed that the non-farm payrolls increased by 199,000 in the month, the unemployment rate unexpectedly fell to 3.7%, and the hourly wage rose by 0.4% month-on-month higher than expected.

The latest non-farm report challenged the view that the United States will cut interest rates quickly next year, the signs of the Federal Reserve's needed turn are not obvious, and the market also lowered its expectations for the Federal Reserve to cut interest rates in the first quarter of next year. In this situation, the dollar index rose sharply, while the price of gold in New York fell 1.25%, quoted 2020.80 dollars.

Some in the market believe that the US non-farm payrolls report for November could undercut bond market investors' optimistic expectations that the Federal Reserve will cut interest rates as early as March next year. To achieve this goal, the US economy may need to show signs of a sharp slowdown in hiring, spending and investment, but these needed signs have not been evident in recent economic data.

The comments came after Fed chairperson Jerome Powell gave his strongest signal yet that interest rates might no longer rise in early December, but struck a cautious tone, saying it was too early to conclude that the Fed had finished raising rates or to speculate on a rate cut.

At the same time as the US non-farm payrolls report in November, the market is also lowering its expectations for the European Central Bank to cut interest rates. Now it expects to cut interest rates by 125 basis points in 2024, starting as early as March. The Federal Reserve is expected to start cutting interest rates in May next year, and the full-year rate reduction will reach 125 basis points.

Eurozone inflation fell to 2.4 per cent in November from 2.9 per cent in October and was below economists' consensus forecast of 2.7 per cent, according to data released last week. That was the closest it had come to the ECB's 2 per cent target since mid-2021. Economic data, meanwhile, showed further signs of weakness. The data showed that although the final eurozone Markit composite PMI for November came in at 47.6, better than the market's forecast of 47.1, it was still below the 50-point line between boom and bust.

Follow-up or still have a chance

Industrial Research Zhang Juntao believes that the current market is too optimistic about the Federal Reserve's interest rate cut expectations. If the US economy shows resilience and inflation shows stickiness after Quarter 1 next year, the interest rate cut expectations will face a greater risk of correction. At that time, the rebound of the US dollar index will suppress other assets, including gold, and will provide a better opportunity for gold to intervene.

It is worth noting that, despite the delay in interest rate cuts by the Federal Reserve and the European Central Bank, expectations for gold prices are further rising. Looking back at 2023, although the Federal Reserve did not start cutting interest rates as expected by the market at the beginning of the year, it continued to raise interest rates four times to raise the federal funds target rate from 4.5% to 5.5%. The US dollar index remained volatile, but in the high interest rate environment, New York gold prices and Shanghai gold prices performed strongly and rose significantly, exceeding expectations. The year's increase still reached 10.66% and 14.65%.

On the 7th, the World Gold Council said in the "2024 Gold Outlook Report" that the gold purchases of central banks in the first three quarters of this year increased by 14% year-on-year to a record 800 tons. The World Gold Council's survey found that the current gold reserves of the surveyed central banks account for 15% of their foreign exchange reserves, and more than 70% of the surveyed central banks expect global gold reserves to continue to increase in the next 12 months, because inflation, geopolitical risks, Western countries' sanctions, and the multi-polarization of the global reserve currency system are the main factors driving the global central banks to continue to increase their gold reserves. Looking ahead to 2024, the World Gold Council believes that the possible intensification of geopolitical conflicts in some regions and the increase in gold purchases by central banks will support the future trend of international gold prices.

On December 7, statistics from the State Administration of Foreign Exchange showed that as of the end of November, China's gold reserves reached 71.58 million ounces (about 2226.39 tons), an increase of 380,000 ounces (about 11.82 tons) from the 71.20 million ounces (about 2214.57 tons) at the end of October.

Wall Street groups such as UBS expect the Fed's rate cuts combined with a sharp fall in real interest rates to push gold to new highs in 2024 and 2025. Ben Emons, head of fixed income at NewEdge Wealth, the wealth manager, sees economic conditions and the geopolitical backdrop as additional positive catalysts for the gold market. He expects gold's rally to continue into next year.

Shanghai gold prices have risen by 15% this year.

Compared with the 10% increase in the global gold price, the domestic gold price rose more significantly, and the domestic gold retail and jewelry prices also rose further. At present, the domestic retail gold listing price is generally around 615 yuan/gram. According to the World Gold Council's 2023 survey of 538 jewelry dealers in 76 cities in our country, 26.8% of dealers believe that the domestic gold jewelry market still has room for growth.

It is worth noting that, unlike the inflation situation in previous years, the domestic gold price is still rising this year despite the general reduction of production factors. According to data released by the National Bureau of Statistics on the 9th, in November, the national consumer price index (CPI) fell by 0.5% year-on-year, an increase of 0.3 percentage points from the previous month, and the decline hit a new low in three years.

Data from Industrial Research shows that in the next few years, the structural pressure on the domestic real estate market will remain, and the process of local government debt will continue, which may further boost Shanghai gold.

Qi Ding, a researcher at China International Capital Corporation, believes that gold has actually become a financial asset to hedge against credit fluctuations in the US dollar. From the physical supply side, the global gold supply is facing a growth bottleneck, and the output of the top five gold-producing countries is generally declining, waiting for higher incentive prices to stimulate.