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Gold to take hit if US has soft landing in 2024: WGC

Gold had a strong 2023, defying expectations amid a high interest rate environment

Published: Sun 10 Dec 2023, 4:50 PM

Updated: Sun 10 Dec 2023, 6:58 PM

By
Issac John

Gold prices are likely to take a hit if the US economy achieves a largely anticipated soft landing in 2024 and avoids a recession, despite rising inflation and interest rates this year, according to the World Gold Council.

Gold had a strong 2023, defying expectations amid a high interest rate environment, and outperforming commodities, bonds and most stock markets. However, a combination of geopolitical tensions and continued central bank buying should see demand remain resilient next year, the WGC said.

The yellow metal broke through $2,100 per ounce last week before moderating slightly, and spot prices were hovering at around $2,030 per ounce early Friday.

Looking forward to 2024, WGC analysts said market consensus anticipates a ‘soft landing’ in the US, which should also positively affect the global economy. “Historically, soft landing environments have not been particularly attractive for gold, resulting in flat to slightly negative average returns. 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,” WGC said in its Gold Outlook 2024 report.

“Further, the likelihood of the Fed steering the US economy to a safe landing with interest rates above 5.0 per cent 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 industry body said.

The two most significant events for gold demand in 2023 were the collapse of Silicon Valley Bank and Hamas-Israel war, the WGC said, estimating that geopolitical events added between 3.0 per cent and 6.0 per cent to gold’s price over the year.

“And in a year with major elections taking place globally, including in the US, the EU, India, and Taiwan, investors’ need for portfolio hedges will likely be higher than normal,” the report said, looking ahead to 2024.

According to John Reade, WGC chief market strategist, gold prices would likely remain range-bound but choppy next year. He expects them to react to individual economic data points that inform the likely trajectory of Fed policy until the first interest rate cut is in the bag.

Another supporting factor for the yellow metal looking ahead is further central-bank buying, according to the WGC.

Central banks have been a major source of demand in the global gold market over the last couple of years and 2023 is likely to be a record year. The WGC expects this to continue in 2024.

However, according to Ewa Manthey, Commodities Strategist at ING, gold prices will continue to set new all-time highs in 2024 as they are boosted by a weakening dollar and Fed rate cuts. “Gold has rallied in the last quarter of the year as demand for safe-haven assets has increased and amid bets that the Federal Reserve will cut rates next year,” Manthey wrote in an article for the Dutch banking giant.

Manthey said that even with the strong safe-haven bid, the U.S. Federal Reserve remains the largest single driver for gold prices.

“We believe Fed policy will remain key to the outlook for gold prices in the months ahead,” she said, noting that the strength of the dollar and historically high rates have weighed on gold throughout much of the year.

“The latest US data showed inflation and the labour market are cooling, with markets now pricing in a 50 per cent chance of a rate cut in March and fully pricing in a cut in May,” she said. “Our US economist expects the starting point for Fed rate cuts to be in May and is forecasting 150 basis points of rate cuts next year in total, with a further 100 basis points in early 2025. This should support gold’s move higher,” said Manthey.