KUALA LUMPUR: The blistering rally of gold, whose price jumped 11.5 per cent year-to-date till April 3, may have further room to run in the medium term, according to OCBC foreign exchange strategist Christopher Wong.
OCBC kept its bullish outlook on gold prices, on the back of expectations of global easing outlook, central banks' continued purchases of gold, as well as a play up of gold's geopolitical hedge characteristic.
"Historical evidence since 2001 showed that gold strengthened when the US Federal Reserve (Fed) rate hike cycle ended and continued to extend its bullish run when Fed rate cut cycle gets underway.
"That said, we caution for the risk of a pullback, given the rapid run- up while long gold position looks stretched at extreme levels," Wong said in a report today.
Near term, OCBC is cautious of a potential pullback towards 225, given the rapid run-up and relatively stretched positioning. But bias remains for more upside to play out.
The bank said expectations of global easing outlook is supportive of gold prices.
It pointed out that in the Latin American world, several central banks including Brazil, Mexico and Paraguay had started their respective rate cut cycle.
In the developed markets (DM), the Swiss National Bank (SNB) became the first central bank to cut rates in March while most major DM central banks including the European Central Bank (ECB), Bank of England (BoE), Bank of Canada and the Fed are likely to cut policy rates in due course as inflation has peaked and looks on track to return to target.
"The Fed has projected three cuts for 2024 while markets are pricing in about four cuts for ECB, three cuts for BoE, two more cuts for SNB by end 2024," Wong said.
Given that most DM central banks could soon ease monetary policies, OCBC revisits the behaviour of various asset classes, including gold, silver, S&P 500 and DXY in past episodes of Fed rate cut cycles as well as past episodes when Fed rate was on hold after rate hike cycle ended.
Since the Fed's last hike in July 2023, gold has rallied about 16 per cent (roughly coming into the historical range).
"If history is a guide, then gold may still have further room to run higher when actual rate cut cycle starts (and this may also come with the assumption that US may enter a recession at some point later," Wong noted.
OCBC said a quick glance revealed that gold outperformed most currencies on average terms every year since 2001.
"There were periods when gold dramatically underperformed and they were in 2013 taper tantrum, 2015 first Fed hike, 2018 late cycle Fed hike and in 2021 (the lead-up to Fed's first hike in 2022-23 cycle)," he said.