Central banks’ buying and safe-haven flows supported gold prices in 2023

Gold prices have been resilient through 2023, briefly pushing to an all-time high of US$2,135 per ounce this week, despite the US interest rate registering its highest level in more than 22 years. The staggering performance could come amid strong central banks' demand and safe-haven flows from geopolitical tensions in the Middle East, which aid to offset the downward pressures that were incurred from the surge in Treasury yields and US dollar’s strength.

Data from the World Gold Council revealed that on a year-to-date basis (as of 3Q 2023), the net 800 trillion tonnes of purchases from central banks are 14% higher than the previous year. The onset of the Israel-Hamas war in October has also triggered some safe-haven flows for the yellow metal, which saw prices reclaim its key psychological US$2,000 level. The likelihood for the conflict to drag on for longer may continue to underpin safe-haven demand into 2024, alongside the shift in rhetoric from the Federal Reserve (Fed) on its policy outlook.

Landscape for gold may remain supportive into 2024

As we head into 2024, the macro backdrop for the yellow metal may turn for the better as Fed’s rhetoric continues to head in a less hawkish direction, while the narrative for rate outlook has taken on a different course from this year. Following the Fed’s most aggressive series of rate hikes in 40 years, markets are now looking for 125 basis point (bp) worth of rate cuts through 2024, with firm belief that we have already seen the peak in the Fed’s hiking cycle.

Thus far, moderating inflation in the US and the sharp dip in the US economic surprise index to its six-month low have been supportive of such dovish pricing, with the trend of softer economic conditions likely to persist into next year as a reaction to tight monetary policies. Rising economic risks will remain a key theme in 2024, with any renewed recession calls potentially supportive of the safe-haven gold due to its historical track record of delivering positive returns in six out of the past eight recessions. Any failure for the US dollar to reclaim its 200-day moving average (MA) ahead may also be supportive of the yellow metal, based on their general inverse relationship.

Still-neutral broad positioning may allow room for catch-up buying

Commodity Futures Trading Commission (CFTC) data revealed that money managers have increased their net-long positioning in gold to its highest level since May 2023 (144,410 lots as of 28 November 2023), but remained a fair distance away from its peak positioning in 2016 and 2019 (~280,000 lots).

Despite the resilient performance in gold prices, exchange-traded funds (ETFs) backed by physical gold have instead witnessed five straight months of outflows in October 2023. The still-subdued appetite for gold may potentially offer room for some catch-up buying if the yellow metal were to gain traction on further rate-cut talks, which may help to provide some support for prices.

Technical analysis: Break above ranging pattern to remain on watch into 2024

Gold prices have been trading on a broad consolidation pattern since June 2020, with recent attempt for an upward break of the upper resistance range eventually failing to sustain into the close. While this suggests that the bears are not ready to give up on defending the key resistance at the US$2,074 level just yet, any further retest of the US$2,074 will remain on watch into next year as the general trend remains upward bias.

For now, its weekly relative strength index (RSI) continues to hang above the key 50 level as a sign of bullish momentum in place, while its weekly moving average convergence/divergence (MACD) has also defended its zero-line lately. On the downside, the psychological US$2,000 level will serve as immediate support to hold, followed by the US$1,950, where its 200-day MA may stand.