A golden dud? Is the gold price behaving as it did in May 2023?

Let us recall that in May 2023, gold prices on global markets reached historic highs, which was caused by, among others, concerns about a global economic recession and the instability of the US banking system. The price of gold reached a record value of USD 2,085.40 per ounce, which was dictated by the demand for safe assets in the face of nervousness in the financial market. It should be mentioned that this record price occurred at night, with low market liquidity. As a result, gold prices dropped to USD 2023 in the next month, June 1900.

What could be causing high gold prices?

As it was written then, market strategists predicted that gold prices could rise in the second half of the year when Federal Reserve will end its aggressive cycle of tightening monetary policy, which could result in a decline in real bond yields and a weakening of the US dollar. This could currently be happening, pushing up the price of gold with conflict in the Middle East. This event essentially kicked off the rally in gold prices from the $1850 level in the first half of October.

Currently in early December 2023, gold market achieved another historical record. In the early days of the month, the price of gold reached a new high, exceeding the previous record set in August 2020, reaching a price of almost USD 2150 per ounce, again overnight in low liquidity. This price increase was fueled by expectations of a potential interest rate cut as early as March. Markets ignored comments from Federal Reserve Chairman Jerome Powell on the need for a continued restrictive approach to monetary policy to bring inflation down to 2%, as reflected in the tool CME FedWatch, indicating a more than 50% chance of a rate cut in the first quarter of 2024.

Gold price – May repeat?

On December 4, 2023, the price of gold fell sharply by more than 2%, reaching USD 2,022.99 per ounce, which was likely related to the rebound in the dollar, although expectations of an interest rate cut in 2024 somewhat mitigated the decline. You should also perhaps consider that the market may be "tired" of these high prices and it may be premature to wait for them to continue. If we take into account the implied volatility for gold prices from the GVZ index (17% per year), it is possible that the gold price may reach at least USD 1990 by the end of the year. Further support may fall around USD 1960.

Meanwhile, if the May scenario were not to be repeated, the market could potentially head towards USD 2160-2200 by the end of the year.