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Currency Outlook:

As far as the rupee goes for 2024, on the domestic front, momentum will be driven by centre elections and flows that will be attracted in the equity and debt segment. Now that India has positioned itself in the JP Morgan bond index it is likely to attract flows to the tune of over $25billion. On the global front, the Fed is near its peak for the tightening cycle and dot plot suggest that the Fed could even cut rates thrice in 2024. The Fed has been quite vocal in highlighting that the ‘Data-Dependent’ will be the approach going ahead. In 2024, the US is preparing for its Presidential elections that is scheduled at the end of the year and is going to be one of the key events that will set the tone for 2025. As far as the Dollar Index is concerned we expect the momentum to be marginally negative considering that the Fed will remain dovish in their outlook and that would be triggered by softening economy. Active intervention by the RBI could keep the volatility in check for the rupee and we expect it to trade in the range of 81.00 and 85.00.

Precious Metal Outlook:

Gold-posted gains of ~13-15% YTD, Silver too has gained by more than 8% YTD on the back of, Geo-political tensions, central banks action, whipsaws in Dollar Index and US Yields and few others, which triggered a move in market. Central banks were active this year about interest rate hikes with an objective to ease the inflation down. Along with central banks action, we witnessed a black swan event this year as well raising the risk premium for safe haven assets. Let’s take a glance of how the previous year was and what factors could influence prices in the 2024.

Central Banks Action

It has been a short and an aggressive journey for interest rates as major central bankers have announced more than ~1700 bps of hikes since the start of last year. CPI of all major economies have fallen from their recent peaks, amidst fall in energy and food prices and QT by central banks, however the Core and Super Core CPI are still showing signs of worry.

After an upward journey for interest rates, market participants are now expecting a shift in the overall stance, after the last Fed policy meeting in 2023. Governor Powell in Dec’23 policy meet signaled a pivot, raised probability for three cuts in 2024, lowered the growth forecast and made little or no change in inflation overview. Few fed officials however are not convinced with this dialogue and are putting cold water on these expectations, mentioning that it’s too early to talk about rate cut and we could see these higher rates for longer. Gold, Silver and other metals have already started to discount a rate cut in March’24, it will now be important to see the balance between Growth and inflation and the pace of interest rate cuts.

Geo-political Tensions

Since 2020, there have been one black swan event after other, like the pandemic, Russia-Ukraine war, Israel-Hamas war, debt crisis; these have built-in the risk premium in gold. Geo-political tensions always stimulate the safe haven appeal of gold and silver prices, these two assets always post a sharp rally during the time of uncertainty or panic. It is interesting to see that not all these major events and geo-political tensions have eased down peacefully - every uncertainty has been giving jerks to the market form the sidelines at certain intervals. Do more countries like China-Taiwan get involved in these wars like situation in the next year, is now important to see?

Growth concerns

Aggressive rate hikes and Geo-political tensions are primary triggers for increase in growth concerns. Along with Fed, institutions like IMF, World Bank have also lowered growth forecast for next year; along with debt servicing cost increasing, debt and spending limits were also hit in 2023, making market participants nervous about this bubble bursting soon. There has been a lot of debate regarding soft and hard landing post the rate hikes, however, Fed officials and US GDP data till now are building optimism for a softer landing.

Central bank gold buying

Central banks purchased around 800 tonnes of gold over the first three quarters of 2023, 14% ahead of the same period last year, according to data from the WGC. Last year, global central banks purchased a record 1,136 tonnes of gold, compared to 450 tonnes bought in 2021, mostly driven by a flight towards safer assets amid soaring inflation. Last year was not only the thirteenth consecutive year of net purchases, but also the highest level of annual demand on record back to 1950.

Outlook

There surely are many factors to look at when we talk about the next year as along with monetary policy changes, fluctuations in Dollar Index and economic data points could provide triggers in the market. Even after such aggressive rate hikes, market participants will keep an eye on inflationary concerns and Fed’s move accordingly. We have already seen impact of rate cuts kicking in Gold and Silver prices however if data and inflation suggests otherwise and Fed does not ease the stance as per market expectations, that could cap gains for safe haven assets. However, the risk premium on the back of geo-political tensions, lower Dollar Index, higher rate cut expectations, slower growth fears, inflows in ETF, central bank gold bank spree, development in China and green technology and possible rupee deprecation could keep the floor strong

Base Metal Outlook:  

Commodities had a very positive start to 2023, which was a good follow up from what we have seen in 2021 and 2022, however the end was not as expected with the complex down for the year. China’s reopening story has not gone as planned, with a number of weak spots in the economy, particularly the property sector. Meanwhile, central bank tightening and a stronger US dollar have provided strong headwinds to commodity markets.

The outlook for metals largely hinges on China, and the offtake in certain pockets looks quite promising suggesting a revival in metals demand. In addition, LME base metal inventories have edged higher in recent months from multi year lows, easing concerns over tight markets in the short term, although on a historical basis, exchange inventories are still tight.

For 2024, most base metal markets are expected to keep swinging between a smaller surplus and deficit quite easily, depending on how demand plays out. Longer term fundamentals for most metals and historically tight inventories suggest that there could be some positive upside, despite largely balanced markets.

LME metal prices have been quite volatile with a positive start to the year, followed by a fall for much of the year, ending with flatter returns. Global monetary tightening, Chinese underperformance has weighed on developed economies. However, supportive fundamentals, lingering geopolitical risks and expectations of Federal Reserve easing suggest the metal basket will trend higher next year. Medium term trend looks promising as demand from green industries will continue to grow.

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