Geopolitics, central banks to provide support for gold in 2024 — report

Gold bullion. (Image by stux, Pixabay).

While gold has already performed exceptionally in 2023, defying expectations amid high interest rates and outperforming commodities, bonds and most stock markets, the World Gold Council still sees a strong case for strategic investing as we head into the new year.

It its 2024 outlook published on Thursday, the WGC said heightened geopolitical tensions in a key election year for many major economies, combined with continued central bank buying could provide additional support for the yellow metal.

The likelihood of the Federal Reserve steering the US economy to a safe landing with interest rates above 5% is by no means certain, and so a global recession is still on the cards. This should encourage many investors to hold effective hedges, such as gold, in their portfolios, it said.

The WGC report points to three likely scenarios the global economy is facing that could determine the direction of gold in 2024:

Source: World Gold Council

The first is the market consensus of a “soft landing” engineered by the Fed, which the Council says would be a welcome outcome for many investors. However, its execution requires razor-sharp precision by policymakers and also relies on many factors outside of their direct control.

This is also why a soft landing is considered a rare feat; historically, the US central bank has only managed a soft landing only twice following nine tightening cycles over the past five decades. The other seven ended in a recession – or a “hard landing”, which is the second scenario.

A key determinant of whether economic conditions will shift from a soft to a hard landing is the labour market. While unemployment in the US remains low, some of the factors that kept it resilient in 2023 – such as a dearth of labour supply and solid corporate balance sheets aided by a healthy consumer wallet – have not only faded but have a historical tendency to turn quite quickly.

A third, less likely scenario is the “no landing” outcome characterized by a reacceleration of inflation and growth, driven by a rebound in US manufacturing and recovery in real wages. However, the WGC noted that this is less of an outcome but more of an interim state, referencing Morgan Stanley’s description that “a no landing is just a soft or a hard landing waiting to happen.”

From a historical perspective, the first and third scenarios could result in a flat to slightly weaker average gold performance next year, the Council said, adding that this time around there are two additional factors in gold’s favour: geopolitical risk and central bank demand.

The probability of a recession is not insignificant. From a risk-management perspective, this would provide strong support to the case of maintaining a strategic allocation to gold in the portfolio, the report concluded.