Gold Outlook 2024, World Gold Council: World Gold Council in it’s 2024 Outlook says the anticipated easing of policy rates may not be as favorable for gold as it seems on the surface. Conversely, numerous analysts express heightened optimism for gold, anticipating a potential rate cut by the Federal Reserve.
Gold’s Dual Role: A Complex Interplay of Consumer Good and Investment Asset
World Gold Council in report says Gold, acting as both a consumer good and an investment asset, finds itself at the crossroads of various influences, including investment flows, fabrication demand, and central bank initiatives. The Council explores the intricate relationship between gold and economic scenarios, shedding light on its historically divergent performance during periods of soft landings. Unlike bonds and stocks, gold has exhibited varied reactions, prompting a meticulous examination of the driving forces behind this phenomenon.
Competing Forces and Potential Implications
The Council identifies two pivotal forces driving gold’s trajectory: lower nominal interest rates and lower inflation. While lower nominal rates are expected to provide a respite for gold, a closer examination suggests a nuanced picture. The anticipated drop in longer maturity yields, influenced by policy rate cuts, may translate into a modest gain for gold. However, the equilibrium is disrupted by factors such as inflation trends, real interest rates, and potential constraints on gold consumer demand, challenging the optimism surrounding policy rate easing.
The report says “Lower nominal interest rates should bring a respite for gold: 75–100 bps of policy rate cuts are likely to translate into no more than about c.40–50bps of longer maturity yield drops. We estimate this response given the bull steepening that has occurred during past soft landings and we also factor in continued term premium pressure, quantitative tightening and high issuance supply in 2024. That drop in longer maturity yields, all else being equal, suggests a gain of about 4% for gold.”
Further the report says ” If inflation cools more quickly than rates – as it is largely expected to do – real interest rates will stay elevated. In addition, subpar growth could constrain gold consumer demand. In summary, expected policy rate easing may be less sanguine for gold than it appears on the surface.”
Recessionary Outperformance and Market Dynamics
Exploring the potential scenario of a recession, the Council contends that weaker growth could align with historical trends, creating a positive environment for high-quality government bonds and gold. However, the report acknowledges the intricacies of economic landscapes, presenting potential challenges for gold in the event of a no-landing scenario, where higher rates and a stronger US dollar could impede its performance.
Factors Favoring Gold in 2024: Geopolitical Risks and Central Bank Demand
Intriguingly, the Council introduces two pivotal factors favoring gold in the coming year. Geopolitical risks, exemplified by events such as the SVB failure and the Israel-Hamas conflict in 2023, added significant impetus to gold’s performance. With major global elections on the horizon, the need for portfolio hedges is anticipated to rise, potentially bolstering gold’s standing. Additionally, the report underscores the crucial role of central bank demand, which has defied expectations in recent years and is expected to continue, providing a notable boost to gold’s performance.
Conclusion: The Unpredictable Path Ahead
As the World Gold Council navigates the intricate landscape of 2024, it underscores the historical patterns, potential market dynamics, and the influence of geopolitical and central bank factors on gold’s trajectory. Whether the year unfolds as a soft landing, no-landing, or recessionary scenario, the Council advises a cautious approach, maintaining a strategic allocation to gold in investment portfolios as a prudent risk-management strategy.