Gold performed exceptionally well in 2023, surpassing expectations in a high-interest-rate environment and outperforming commodities, bonds and most stock markets.
The recent surge in gold prices, especially in the last quarter of 2023, can be attributed to a growing preference for safe-haven assets amid rising uncertainty. The outbreak of the conflict between Israel and Hamas in October 2023 further propelled the yellow metal toward its previous record high of $2,075 per ounce set in 2020.
Although concerns about a broader conflict in the Middle East have eased, gold has maintained its strength, supported by a weaker U.S. dollar and decreased interest rates. Gold prices, based on futures contracts for December delivery, reached an all-time high of $2,071 per ounce on December 1. They recorded advancements in seven of the past eight weeks. From the beginning of the year until December, gold prices rose by 12 percent.
In 2023, the global economy proved remarkably resilient, particularly in light of the Federal Reserve‘s decision to raise interest rates to their highest level in 22 years. Moreover, discussions about an imminent recession diminished as the year progressed.
In its Gold Outlook 2024 report published in December, the World Gold Council (WGC) stated that many economists now expect a “soft landing” in the United States. This involves the Federal Reserve successfully curbing inflation to meet the target without triggering a recession, a development deemed favorable for the global economy.
The report added: “That said, every cycle is different. This time around, heightened geopolitical tensions in a key election year for many major economies, combined with continued central bank buying, could provide additional support for gold. Further, the likelihood of the Fed steering the U.S. economy to a safe landing with interest rates above 5 percent is by no means certain. And a global recession is still on the cards. This should encourage many investors to hold effective hedges, such as gold, in their portfolios.”
The global economy faces three possible scenarios in 2024, according to WGC’s economic scenarios. The council also outlines their probability of occurrence and the main drivers of gold.
WGC expects that the only scenario among the three that would put downward pressure on gold prices would be an economic expansion without a slowdown in growth. It sees only a 5 to 10 percent chance of this scenario happening.
The report states that what is much more likely to happen is either a soft economic decline characterized by slow but continuing economic growth, or a sharp decline accompanied by recession.
WGC expects a 45 to 65 percent probability of a soft decline. This, in turn, will maintain a steady upturn in gold prices. Meanwhile, WGC expects a 25-55 percent chance of a sharp decline occurring. If indeed this occurs, gold prices would rise significantly. Regardless of which scenario proves true, uncertainty in the meantime should support the demand for gold.
WGC proceeds to identify the two pivotal events that influenced gold demand in 2023. The first is the collapse of Silicon Valley Bank, and the second is the Hamas attack on Israel. Accordingly, the council estimates that geopolitical events contributed between 3 and 6 percent to the price of gold over the course of 2023.
Central banks buy gold
Another contributing factor to the rise in gold prices is the upswing in central banks’ gold acquisitions. The World Gold Council anticipates that central bank purchases will persist throughout 2024, mirroring the trend observed since the onset of the global financial crisis.
In the third quarter year-to-date, central banks acquired 800 metric tons of gold. This marks a 14 percent increase compared to the corresponding period last year. Consequently, official institution acquisitions have played a pivotal role in defying expectations for gold over the past two years.
In 2023, WGC estimates that heightened demand from central banks contributed more than 10 percent to the increase in gold prices. These banks are expected to continue buying in 2024, even if it does not reach the same peaks witnessed in the preceding two years. As outlined in the WGC report, the buying trend (i.e., more than 450-500 tons) should provide an additional boost to gold prices.
Gold exhibits volatility
John Reade, chief market strategist at WGC, said in statements to CNBC that gold prices would likely remain within a specific range but exhibit volatility in 2024. He expects that individual economic indicators that determine the potential trajectory of the Federal Reserve’s policy will influence prices until the first interest rate cut occurs.
Markets currently expect the first 25 basis point cut to the federal rates as early as March. Meanwhile, some analysts are suggesting a reduction in June. While interest rate cuts are generally perceived as positive for gold due to lower cash yields, Reade highlighted two potential less-optimistic scenarios. First, if inflation declines more rapidly than interest rates, as is largely expected, real interest rates could remain elevated. Second, lower-than-expected growth may impact consumer demand for gold.
Furthermore, 2024 will witness major elections taking place globally, including in the United States, the European Union, India and Taiwan. Consequently, investors are likely to have a heightened need for hedging portfolios compared to usual circumstances.
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