Gold prices headed for ‘breakout’ rally, says J.P. Morgan

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Gold ended the year on a high — an all-time high — touching US$2,135.39 an ounce.

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Since then prices have come down. Spot gold was up 0.4 per cent at US$2,038.19 this morning as investors await key inflation data from the United States.

Is that as good as it gets?

Not by far, say J.P. Morgan analysts. They predict the same forces that drove gold to a record in December will take it to new heights in 2025.

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“Across commodities, for the second consecutive year, the only structural bullish call we hold is for gold and silver,” said Natasha Kaneva, head of global commodities strategy at J.P. Morgan.

So what is driving gold prices?

A weaker U.S. dollar and expectations of Federal Reserve interest rate cuts were the big drivers late last year and analysts expect that to continue. On average the price of gold has risen after the first cut of the last three Fed cycles in 2001, 2007 and 2019.

Economic and geopolitical uncertainty is another driver, as gold is seen as a investing haven because of its ability to hold its value. It has low correlation with other asset classes so works as insurance when markets are falling, said the analysts.

“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,” said Gregory Shearer, head of base and precious metals strategy at J.P. Morgan.

Analysts expect a modest retreat in prices in the first half of the year, with gold falling as low as US$1,950. But this can be viewed as an opportunity for investors to position themselves for the “breakout rally” expected in mid-2024, as the U.S. economy slows and expectations of a Fed cut rise, they said.

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If all goes as J.P. Morgan expects — the first Fed cut in June and a total of 125 basis points of cuts this year — gold should climb steadily starting in the fourth quarter to peak at US$2,300 in 2025.

“We think over this period, the Fed cutting cycle and falling U.S. real yields will once again become the mono-driver behind gold’s breakout rally later in 2024. Gold’s inverse relationship to real yields has historically been weaker over Fed hiking cycles, before strengthening again as yields fall over a transition into a cutting cycle,” Shearer said.

Oh and there’s another way central banks boost gold — by buying it.

Central bank purchases were a major driver of gold prices in 2023 and JP Morgan expects that to continue in 2024. About 950 tonnes was bought in 2023, analysts estimate, more than the record demand the year before.

“There is still scope for boosted reserves at some central banks as institutions look to diversify reserve assets, so purchasing is likely to remain structurally elevated compared with the late 2010s,” Shearer said.

Investor appetite has been weaker with ETF holdings in gold falling steadily since mid-2022, but analysts expect that to reverse when interest rates start to come down.

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“Continued robust central bank purchases, along with boosted physical demand on price dips will likely remain a significant support to prices over the final twists and turns of the Fed cycle,” said Shearer.

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If inflation is cooling how come groceries are still so expensive?

Grocery price inflation has pulled back to 3.4 per cent year over year, down 8 percentage points from its peak a year ago, data showed last week. And industrial product prices for food manufacturers are down 1.2 per cent year over year, the first drop since 2018, signalling more relief ahead, said BMO chief economist Douglas Porter who brings us today’s chart.

“Yet, despite this much better news, try telling it to consumers that food inflation is relenting,” said Porter.

The reason prices still seem high is because they took such a giant leap in recent years. Porter uses the example of the basics bread and milk, whose price increases have been pretty flat over the past year. But that follows a 27 per cent surge in the price of bread and a 17 per cent jump in the price of milk in the two prior years.

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• Canada’s big banks will report their first-quarter results, starting today with Scotiabank and Bank of Montreal. Royal Bank of Canada and National Bank of Canada are out on Wednesday and CIBC, TD Bank and Laurentian Bank release their results Thursday.
• Today’s Data: United States durable goods orders, Conference Board consumer confidence
• Earnings: Lowe’s Co. Inc, Macy’s Inc, Devon Energy Corp, Tricon Residential Inc, EBay Inc, Beyond Meat Inc, Parkland Corp

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Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line at aholloway@postmedia.com with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course). If you have a simpler question, the crack team at FP Answers led by Julie Cazzin or one of our columnists can give it a shot.

McLister on Mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Read them here 

Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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