As we usher in 2024, gold is poised to continue its strong performance, driven by three key catalysts: demand, the Federal Reserve’s monetary policy, and the January effect. The yellow metal ended 2023 with a 13 percent gain, its best since 2020, despite facing headwinds from a strong dollar and higher interest rates.
The fourth quarter of 2023 saw gold rally as markets anticipated an end to the Federal Reserve’s inflation battle. Gold reached a new record high in early December, peaking at just over $2,125 an ounce. Although it couldn’t maintain these highs, it has since established strong support at $2,000 an ounce, setting the stage for potential new highs in 2024.
Saxo Bank’s Ole Hansen identifies three significant demand factors that could boost gold in the new year. He cites momentum-chasing hedge funds, central banks’ continued purchase of physical gold, and renewed demand from ETF investors as key drivers.
Central banks worldwide showed a strong appetite for gold in 2023, with no signs of slowing down. They bought a net of 800 tons of gold through the first three quarters of 2023, a 14 percent increase from the same period in 2022. The World Gold Council’s 2023 Central Bank Gold Reserve Survey indicates that 24 percent of central banks plan to add more gold to their reserves in the next 12 months, and 71 percent believe global reserves will increase in the next year.
ETF investing in gold was less robust in 2023, but outflows slowed significantly in November, with North American ETFs recording gold inflows for the first time in five months. As gold prices rally, we can expect more gold to flow into ETFs, boosting overall global gold demand.
The Federal Reserve’s monetary policy is the most significant factor driving the precious metals market. The gold rally began when markets anticipated an end to the central bank’s rate hikes and a shift towards rate cuts. The Fed’s December FOMC meeting confirmed these expectations, with dot plots indicating three rate cuts for 2024 and another four in 2025, lowering rates to between 2 and 2.5 percent.
Despite inflation remaining above the Fed’s 2 percent target, the central bank is easing out of the fight, hoping it has done enough to tame price inflation without crashing the economy. The perception is that the Fed has won the inflation fight with no collateral damage to the economy.
However, the reality is that by declaring victory and pivoting to rate cuts, the Fed is returning to the very policies that caused price inflation in the first place. This means more inflation is likely on the horizon. But whether the Fed cuts rates because it believes it has beaten inflation or because it is fighting a deep recession, it is equally bullish for gold.
Gold has performed well despite these challenges and has significant momentum moving into the new year. Historically, January has been a good month for gold, with an average return of 1.79 percent since 1971.
The World Gold Council identifies three factors that could boost gold’s January performance: gold restocking in East Asia ahead of the Lunar New Year, Federal Reserve rate hikes on hold, and potential dollar weakness.
As we move into 2024, the demand factor, the Fed factor, and the January factor provide three compelling reasons to be bullish on gold.
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