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Gold outlook in 2024: Is geopolitical demand overshadowing Fed policy?

Gold prices are widely expected to continue their upward march in 2024, after having returned 13% last year despite a hawkish Fed; outperforming bonds and most commodities, and performing similarly to the tech-heavy NASDAQ.

As a result of a dovish Fed and expectations of rapid rate cuts, analysts at JP Morgan estimate a target price of as high as $2,300 in 2024.

The added complexity for gold comes from it being both a consumer good and an investment asset – a non-yielding one that is also considered to be one of the best hedges against inflation and unforeseen economic events.

The prime concern looking ahead for markets is whether the Federal Reserve can truly execute a soft landing.

There is considerable confusion over the economy’s likely trajectory with Bloomberg Economics placing the probability of a hard landing as high as 55%, while the Cleveland Fed estimates this to be as low as 28%.

Thus, a global recession is still very likely.

The sheer divergence in expectations between the market and the Fed is likely to be the central risk for 2024, made even more uncertain by the military and geopolitical shifts taking place.

However, Iran’s recent deployment of a warship into the Red Sea has only intensified already heightened tensions and is also exerting upward pressure on gold prices.

A quick recap of 2023

Amid substantial market volatility and the rapid pace of Fed hikes in 2023, the yellow metal performed positively and finished the year at approximately $2,070.

Earlier on in the year, gold scaled the $2,000 mark as a response to the fast-brewing crisis in US regional banks, before the Fed, Treasury and FIDC officials stepped in to ease market concerns, leading to a sustained drop off to $1,800 levels by October 2023.

However, this was reversed in October 2023 as fresh geopolitical complications took hold in the Middle East following the outbreak of the Israel-Palestine war.

Prices continued to rise until they witnessed an unprecedented surge in early December 2023, with gold hitting a record high of $2,153.4, on the back of market beliefs that the Fed appeared to abandon its ‘higher-for-longer’ strategy; coupled with unanticipated military action in the Red Sea.

Surendra Mehta, Director, India Bullion and Jewellers Association Ltd. (IBJA), termed the event,

…a freak trade…

Despite the continued ups and downs of the market, gold managed to maintain its sheen on account of a multitude of factors including the panic around the US’s regional banking crisis which saw the collapse of major entities such as SVB; ongoing geopolitical tensions – first, with the Ukraine-Russia war, followed by the Israel-Palestine war, and lastly, with escalating Red Sea tensions; consistently robust central bank demand for physical gold; and the Fed’s dovish pivot coupled with the ongoing decline in the greenback since October 2023.

In an April 2023 piece for Invezz entitled “Gold and silver outlook as 23 states move to reclaim precious metals as legal tender “, we quoted Mike Maloney, Founder of GoldSilver.com and noted author, who applauded the metal’s historic stability and store of value properties,

…it is the ultimate money because there is nothing else even in the same league…That is what makes gold the most beautiful money of all.

Looking ahead to 2024

Upward momentum for gold prices in 2024 is widely expected to remain intact with many of the same forces carrying over from the previous year, i.e., a dovish Federal Reserve, geopolitical upheaval, and firm central bank purchases.

The Fed, rates, and the dollar

Usually, looser Fed Policy implies that a non-interest-yielding asset such as gold becomes more competitive against other mainstream financial instruments.

In addition, the expectation that the Fed had reached peak interest rates, and then elected to deviate from ‘higher-for-longer’ policies, fuelled suspicions that the Governor Powell-led FOMC feared the prospect of overtightening.

Despite Powell’s insistence that rate cuts are only just coming “into view”, analysts at EY anticipate that the Fed will reduce rates four times in 2024, while Goldman Sachs economists projected as many as five.

After all, the December dot plot did imply that the forecast for the average policy rate was lowered to 4.6% as against 5.1% in the September 2023 Summary of Projections.

In addition, the set of dots for 2024 extended as low as 3.8%.

Following this, the US PCE declined to 2.6% YoY, undershooting Investing.com expectations of 2.8% YoY; thus, it is becoming more challenging for the FOMC to prevent markets from pre-empting rate cuts.

Lower rates result in a weaker outlook for the dollar, which usually bodes well for globally traded commodities since they tend to be priced in the greenback.

Geopolitics, economics, and recession risks

Houthi attacks on shipping lines have intensified.

Overall, major cargo vessels have decided to avoid the region and reroute deliveries from around the Cape of Good Hope.

Iran recently dispatched a vessel to the region after the US struck down three Houthi boats.

Without clarity on Iran’s objectives, risks are mounting within the already volatile arena.

Things heated up further with UK Defence Secretary Grant Shapps supporting moving against the region, when he stated,

“If we do not protect the Red Sea, it risks emboldening those looking to threaten elsewhere including in the South China Sea and Crimea.”

In addition, tensions with Russia are escalating following moves by the US and its allies to confiscate already-frozen Russian assets to the tune of $300 billion.

Elections

During the year, US election risks may lead to policy uncertainty, which could further elevate the profile of gold’s store of value properties.

Geopolitically sensitive Taiwan shall go to polls in January 2024, while the European Parliament is scheduled to have elections in June.

Slowing global growth

Lastly, the International Monetary Fund (IMF) projected an economic slowdown to 3.0% YoY for 2024, as compared to an earlier forecast of 3.5% YoY.

This may potentially encourage investors to shift away from riskier assets and diversify their portfolios into precious metals.

In China, given that additional stimulus measures are likely to be rolled out, consumption demand is expected to rebound in the jewellery segment.

However, consumer appetite will finally also depend on private sector confidence going ahead and the health of the property market.

Central bank purchases and other sources

Physical purchases of gold by central banks have continued to accelerate.

Source: World Gold Council (data from Q1 to Q3 for 2023)

The bullish trend in government purchases amid high inflation and geopolitical uncertainty has been a key driver for gold prices and demand.

As per the World Gold Council (WGC), estimated physical gold buying shall remain above-trend in 2024, i.e. over 450 – 500 tonnes.

This shall continue to provide strong support to prices and upward momentum.

However, monetary authorities’ concerns may have been aggravated by recent plans to confiscate frozen Russian assets overseas. 

Over the next twelve months, FX Street analysts estimate central banks to purchase significantly more physical metal at 800-850 tons.

Other sources of demand

The WGC report on 18th December 2023 noted that the top gold ETFs are witnessing significant inflows with Invesco Physical Gold GBP Hedged ETC, Switzerland-based Raiffeisen ETF – Solid Gold Reliable and Traceable, and the Istanbul Gold Exchange Traded Fund noting a YTD demand rise of 1,552.0%, 409.3%, and 136.5%, respectively. 

November flows were most significant for the SPDR Gold Shares ETF which breached dollar inflows of $1 billion in November 2023.

Demand for these segments is expected to continue to show growth.

Outlook for gold prices

Although the pace of Fed policy has been the paramount concern for market participants, this may be changing amid fresh developments in the Red Sea and the confrontational narrative emanating from the UK government.

The WGC projected three potential scenarios for 2024 – soft landing, hard, and no landing with probability ranges of 45-65%, 25-55%, and 5-10%, respectively.

Soft landing

Traditionally, gold returns have not been strong within a soft-landing scenario.

This is expected since inflation is brought under control and growth prospects would improve, countering gold’s store-of-value reputation and exaggerating its non-yielding characteristics.

As per the WGC, the average return for gold during the only two recorded soft landings in Fed history stood at (-)1.6%, as against 16.3% for treasuries and 33.3% for equities.

If a soft landing were to arrive, gold returns could remain relatively flat, but will be conditional on geopolitical fault lines resolving too.

Yet, this will require highly precise decision-making from the Fed and considerable luck vis-a-vis external factors.

Additionally, if inflation falls faster than the Fed cuts, real interest rates will appreciate and consumer demand will waiver, weakening gold prices, at least for a period of time.

Gold prices will continue to be impacted by the uncertainty of market players vis-à-vis the trajectory of Fed policy.

Hard landing

There are serious concerns that the Fed’s hawkish enthusiasm over the course of the cycle could trigger a fresh recession, particularly if monetary lags come to the fore.

Markets seem to actively guarding against this possibility given the anticipation of a flurry of rate cuts on the part of the Fed.

Inflation threat?

In such a case, gold demand will likely rise on safe-haven demand in light of failing financial assets.

However, with the situation in the Middle East on a knife-edge, inflation which has not yet retreated to 2% levels may see an upward bias, perhaps even halting the recent declines in the CPI and PCE.

These fears have been exacerbated by expectations that shipments of fundamental resources such as oil shall also be significantly delayed due to being re-routed around the Cape of Good Hope.

In the worst case, the Fed could potentially be forced to reverse course and resume rate hikes, which has traditionally proved negative for gold.

Yet, even in such a scenario, the Fed may find it highly challenging to step in, having already raised rates to multi-decade highs, and facing the consequences of ballooning interest payments and severe debt defaults, especially as households have drawn down the majority of pandemic-era surpluses.

In addition, as witnessed in 2023, high geopolitical demand for gold maintains strong buying activity, particularly among central banks.

As a result, geopolitical demand for gold could potentially combine with rising inflation to post record highs for gold in 2024.

No landing

In a no-landing situation, which is gauged to be the least likely, markets will likely see an improvement in economic growth and inflation and would likely preclude a deeper recession in the future.

If geopolitics doesn’t dominate…

While lower interest rates are generally positive for gold, these also reflect reduced levels of inflation.

As a result, real interest rates (expressed as the rate of interest minus the rate of inflation) may increase, decrease, or remain uncertain, depending on how the relationship between the two plays out.

Falling inflation could mean that real interest rates rise, stifling consumer appetite, which could cap the gold price at least temporarily.

On the other hand, given the significant traditional safe-haven value against systemic risk including ongoing geopolitical risks and potential recession, investors will likely ensure elevated demand while prices shift higher.

Conclusion

J.P. Morgan analysts place the target price of gold at a record high of $2,300, while UBS though bullish, is not so optimistic and forecasts a price of $2,150.

Regarding the view of Fed officials, a Wall Street Journal piece stated that ,

Last week two officials anticipated no cuts next year and one projected the equivalent of six quarter-point cuts. “That’s a pretty wide range” to take a signal from, Barkin said.

Thomas Barkin is President and CEO of the Richmond Fed.

At the very least, the ongoing monetary policy confusion and geopolitical disharmony are likely reasons enough for investors to increase the diversification of portfolios into gold for its insurance properties.

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