Gold Rally Likely To Continue Amid Rate-Cut Speculation, Yield Trend: Morgan Stanley

Morgan Stanley expects gold prices going up to $2,300 per ounce in 2024, but price action is likely to be choppy as uncertainties remain over U.S. data and rate cuts by the Federal Reserve.

However, if the 10-year real yields come down further, there is a scope for gold to move higher from the current level. The yellow metal also tends to rise after the first Fed rate cut, while elevated geopolitical and political risk in 2024 should also provide support. The World Gold Council observed that elevated geopolitical risk tends to weigh on recycling volumes, according to the research firm.

The Comex Gold positioning has jumped back to 190,000 lots long, but it is well below peaks of 300,000 lots long, it said in a March 15 note.

The upside data surprises, particularly in the US, can stall rate-cut expectations and weigh on gold. Positioning may get overstretched to the upside or high prices may slow consumer purchases, according to Morgan Stanley.

The past few years have seen gold re-price relative to real yields driven by a step change in central bank buying, more than offsetting exchange-traded-fund outflows, the note said.

In 2012, gold prices were similar to today in real terms, driven by central bank buying, and strong demand from China and India (ahead of import duties), the research firm said.

The first two look to be playing out again, while India's demand may improve on a strong economy. Gold was also supported in 2012 by negative real yields, not the case this time, Morgan Stanley said. "Our strategists see real yields continuing to fall, forecasting 10y at 1.55% by Q4, or around another 50 basis points decline, which could allow for further gold price appreciation."

After a flat 2023, jewellery demand — 44% of total gold demand — is looking up for 2024. China's gold and jewellery sales were up 24% year-on-year with strong sales for the year of the dragon.

In India, the WGC expects a recovery too as consumers adjust to higher prices, supported by strong economic growth, while India allowed the Reserve Bank of India to import gold without import levies for the first time recently, it said.