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Is 2024 the Main Stage for Gold Investment?
On December 4th, 2023, the price of gold hit a historical high of $2,135 per ounce, thanks to the Federal Reserve's monetary policy remarks. This once again brought the investment value of gold into the spotlight, with investors around the world eagerly waiting for an opportunity to get in on the action.Fast-forward to 2024, and it seems that gold prices are showing signs of a new round of increases after a recent period of correction. What's more, many institutions are predicting that 2024 will be a crucial year for gold, with some analysts even suggesting that prices could soar to as high as $2,300!
In this edition, let's take a closer look at why institutions are so bullish on the outlook for gold this year.
Review of the historical price of gold
2020 was a year of steady growth, thanks in part to the impact of the pandemic, market panic, and loose monetary policy stimulus. The following two years, however, saw gold enter a period of fluctuation as a result of the Fed's monetary policy tightening and geopolitical factors.
In 2023, while US bond yields and the US dollar index had an impact on the price of gold, it was macro-level factors such as the Fed's rate hike expectations and geopolitical tensions that had a greater influence. As the rate hike drew to a close, the Fed's policy tightening slowed down, and a trend towards easing emerged. In addition, central banks around the world continued to increase their gold reserves, creating a perfect storm that led to a fluctuating upward trend in gold prices throughout the year, culminating in a historical high in December.
The price of gold in 2024 may be influenced by the following factors
1. Against the backdrop of an economic slowdown, the Fed may cut interest rates
According to the World Gold Council's 2024 gold outlook report, a traditional soft landing is not particularly attractive for gold prices. Instead, the council believes that gold prices will rise significantly if a hard landing occurs.
However, regardless of the type of landing, the Federal Reserve is unlikely to sit idly by. Right now, the market is increasingly calling for the Fed to cut interest rates. The expectations show that the Fed will maintain interest rates unchanged in January, and there is a 70.78% chance of officially starting the interest rate cutting process during the Fed interest rate meeting in March.
While high interest rates may make an economic downturn unavoidable, a rate cut could make non-interest bearing assets like gold more attractive. Moreover, interest rate cuts could also lead to rising inflation expectations and currency depreciation, making gold an increasingly attractive hedge against inflation.
Collin Plume, founder of Noble Gold Investments, stated that we experience an economic recession on average every 5.5 years. Each time an economic downturn occurs, you need an asset to keep you afloat while waiting for the rest of your investment portfolio to recover. Gold is the best hedge tool in all investment portfolios.
2. US Treasury yields and a high-level decline of the US dollar
If the Fed shifts towards a more accommodating monetary policy, US Treasury yields could be impacted negatively. This was seen in 2023, as the Fed's interest rate hikes came to an end, and US Treasury yields, as well as the US dollar index, experienced a high-level decline.
In 2024, the market is expecting yields and the US dollar to decline further as expectations of interest rate cuts increase.
For gold, a downward trend in US Treasury yields is generally seen as a positive development. This is because, as bond yields increase, bonds become more attractive to investors compared to gold, which does not generate any interest. As a result, gold prices tend to fall. This is also one of the reasons why US Treasury yields and gold prices are often inversely related.
However, it is worth noting that if the US economy continues to perform well, and the timing of interest rate cuts is postponed repeatedly, while the US government is able to address economic issues such as fiscal deficits, the US dollar could strengthen, causing the price of gold to fall.
3. Increasing global geopolitical instability
Gold is generally regarded as a safe-haven asset that can withstand geopolitical tensions, and its prices often rise during times of increased global tension. Recently, tensions in the Middle East have boosted the demand for "safe-haven assets", which has made gold more attractive. Moreover, the market has increased its expectations for the Fed to cut interest rates as early as March, leading to another round of rising gold prices. As global political tensions continue to escalate, the demand for safe-haven assets is expected to increase further, which would play a crucial role in driving gold prices higher.
However, it is important to note that the surge in gold prices due to conflict expectations is often short-lived. Furthermore, if the conflict does not escalate or if the market becomes desensitized to geopolitical tensions, investors who bet on gold as a "black swan event" may end up taking on more risk than reward.
4. Central bank purchases
Central bank purchases of gold usually have a positive impact on the price of gold. This is because central banks worldwide consider gold as a reserve asset, and buying gold demonstrates trust and demand for the metal. Additionally, central bank purchases of gold can enhance the market's liquidity and stability, thereby increasing the investment value of gold.
Harsh Gahlaut, CEO of FinEdge, expressed his opinion that strong demand from central banks globally is unlikely to decrease significantly in 2024. Ongoing geopolitical risks are driving the de-dollarization trend, which will continue to put pressure on the US dollar and benefit gold. He predicts that robust central bank demand for gold will provide soft support for gold prices, as it did in 2023. India and China are the largest gold buyers globally, and this trend is expected to continue in 2024, providing robust support for gold prices. On the one hand, a strong Indian economy will stimulate consumer demand, while on the other hand, China's weak economy and uncertainty should push up investment demand of gold.
When purchasing gold, investors could choose from the following options:
Physical gold, including gold bars and coins.
Gold ETFs.
Gold mining stocks.
In general, gold is an asset class that performs well during times of global economic uncertainty. With geopolitical risks, economic recession, and rising inflation expectations in the background for 2024, there are compelling reasons to invest in gold. While returns on gold may not be the highest, it can diversify investment portfolios and enhance investment stability. However, it is crucial to note that the gold market still carries some risks and uncertainties, and investors should make investment decisions based on their risk tolerance and investment goals.
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