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Buckle Up for a Rollercoaster: 2024’s Global Currency Wars and Gold Rush

As 2024 enters the global election year, the global geopolitical landscape is complex and changeable, and central banks may continue to increase their holdings of gold in the context of “de-dollarization”, supporting gold prices.

In 2024, the central banks of Europe and the United States are likely to start cutting interest rates, and the downward trend of interest rates will have an impact on asset pricing in the global financial market, and the difference between market expectations and the actual pace of policy implementation will also trigger a wide range of market shocks. The U.S. dollar index is expected to decline as a whole, and external pressure on non-U.S. currencies will weaken.

The U.S. monetary policy pivot will push the U.S. dollar index back from its highs, but the pace and magnitude of the downside could fluctuate significantly.

First, the easing of inflation and the inhibitory effect of high interest rates on industrial production and the real estate market have emerged, so that the Federal Reserve will gradually ease its policy and the interest rate cut cycle will begin. The year-on-year growth rate of US CPI will decline from 6.7% in 2023, with the year-on-year growth rate of CPI in December at 3.4%, and core inflation (excluding energy and food prices) at 3.8%, falling to the lowest level in nearly two years. Some economic indicators in the United States have also weakened, with the ISM manufacturing index below the boom and bust line for 14 consecutive months, and the NAHB housing index gradually falling from above 80 in 2022 to below 40, indicating that the real estate market is relatively sluggish. Easing inflation combined with downward pressure on the economy will prompt the Fed to pivot to cutting interest rates.

Second, from the perspective of rhythm, there is a deviation between the timing of the Fed’s interest rate cut and market expectations, and the game between the two will lead to a wide range of fluctuations in the dollar index. The recently announced U.S. non-farm payrolls in January were 353,000, a new high in nearly a year, and the consumer confidence index rose to a nearly two-year high. The U.S. dollar index is expected to fluctuate in a wide range when market interest rate cut expectations and the Fed’s actual operation are out of sync.

The risk of recession in the euro area still exists, and the European Central Bank is under greater pressure to turn around, and the possibility of cutting interest rates earlier than the Fed cannot be ruled out, and the euro may be weak and volatile. The Eurozone economy is sluggish, with GDP growth only turning from negative to positive to 0.1% in the fourth quarter of 2023, hovering on the verge of a technical recession, and the manufacturing and service PMIs in January 2024 have been below the boom and bust lines for 19 and 6 consecutive months, respectively. At the same time, the impact of the energy crisis subsided and service prices fell, inflation in the euro area continued its downward trend, and the year-on-year growth rate of CPI fell to 2.8% in January, which may fall to 2% quickly under the high base effect. The European Central Bank’s January interest rate meeting kept monetary policy unchanged but sent a signal of marginal dovishness, acknowledging that it is more likely to start cutting interest rates before the end of the summer of 2024, which is more consistent with market expectations, and generally weighs on the value of the euro.

The Bank of Japan has released a signal to explore the exit of ultra-loose monetary policy, and may raise interest rates 1-2 times this year, and the yen is expected to gradually strengthen. Japan’s economy is showing signs of improvement, with industrial production rising 1.8% month-on-month in December 2023 for the biggest increase in half a year, and exports rising 9.8% year-on-year for the largest increase in a year, and GDP growth is expected to pick up modestly. At the same time, Japan’s CPI has exceeded the 2% target for 21 consecutive months, and the Bank of Japan believes that the trend of wage growth will continue to drive inflation and raise future inflation expectations, and the conditions for ending the negative interest rate policy mentioned by Bank of Japan officials are being met. With the gradual divergence of monetary policies from the Federal Reserve and the Bank of Japan, the covering of the carry trade will further support the appreciation of the yen.

Gold prices are expected to fluctuate upwards in 2024 and are expected to break through the previous high. The Federal Reserve’s interest rate cut has pushed the dollar downward, and the global growth uncertainty has risen due to geopolitical conflicts, rising political uncertainty in election years and downward pressure on the economy, and the demand for gold purchases by major central banks around the world has risen, supported by multiple factors, gold prices will gain upward momentum in 2024.

First, in terms of monetary policy, the dot plot released by the Fed in December shows that most policymakers expect three rate cuts in 2024, and the market is currently playing around the timing of interest rate cuts. Subsequently, as the market’s interest rate cut expectations are realized or continue to revise according to the Fed’s statement, gold prices may fluctuate periodically, but they cannot change its upward trend, and it is expected that the timing of gold price rise will be ahead of the start time of interest rate cuts.

Second, in terms of geopolitical and political factors, the United States, Russia, the United Kingdom, India and other countries will hold general elections in 2024, and 2024 will enter the global election year, involving 76 economies and throughout the year. At present, the global geopolitical landscape is complex and changeable, geopolitical risks occur from time to time, and the conflict between Russia and Ukraine and Palestinian-Israeli conflict is still ongoing, and gold has a strong attraction because of its safe-haven attributes.

Third, in the context of “de-dollarization”, central banks may continue to increase their holdings of gold to support gold prices, with central bank gold purchases increasing by 14.3% year-on-year in the first three quarters of 2023, and this trend may continue in the future. Gold prices are expected to fluctuate in a wide range at high levels in 2024.

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