2024: Gold perspectives are good.

Prices should increase. Investors could benefit from that.

2024, will be characterized by sustained economic tensions, rising conflicts, ongoing inflation, the expectation of lower real rates, and the threat of a recession, conditions seem favourable for gold investors. Functioning as a secure asset, gold stands out as an appealing choice for navigating the uncertainties inherent in the prevailing economic landscape.

Gold as a hedge against inflation, geo-political tensions, and recessions.

Gold serves as a unique asset, distinct from yield-bearing instruments like bonds or deposits. In periods of high or rising interest rates, it tends to exhibit lower returns, due to the high opportunity cost vis-à-vis the yield on offer. However, during times of inflation acts as a hedge, attracting traders and investors seeking protection against the devaluation of their capital caused by increasing prices. Furthermore, it is a good asset in periods with low/negative real rates or economic tension. In those situations, gold shines as a reliable haven asset.

The dynamics of gold prices are influenced by various factors beyond simple supply and demand. Elements such as mining production, interest rates, inflation, political instability, and fluctuations in other assets, notably the US dollar, play pivotal roles. The value of gold is closely tied to the strength of the US dollar, where a robust dollar tends to keep gold prices subdued, while a weaker dollar stimulates demand and increases gold prices. Overall, exposure to gold not only mitigates the risk of adverse price movements in other assets but also provides a hedge against economic uncertainties, including currency devaluation and serves as a safety net during periods of political instability.

Anticipated short-term economic uncertainties, such as tensions or wars, are likely to sustain elevated gold prices, with the potential for further increases. Additionally, a perception of heightened geopolitical risks and ongoing gold acquisitions by emerging central banks will continue to support prices. As central banks shift from rate hikes to cuts, which could be in summer in Europe and at the of the year in the US, gold price stands to benefit from this favourable factor. The ongoing diversification of central bank reserves through gold purchases, coupled with a persistent need for coverage, suggests a sustained demand for gold during 2024.

The risk of recession remains latent, especially in Europe. In this scenario, gold usually performs well, as shown in the table below.
Gold during 2023.

Throughout 2023, gold displayed remarkable behaviour amid escalating interest rates, leading to higher real rates and an increased attraction of investors towards bonds and deposits, offering more favourable yields. Concurrently, the equity market, as illustrated by the 25% surge in the S&P500 index, performed well. Surprisingly, gold also exhibited positive performance, reaching historic highs. However, this good performance was in the second half of the year, reversing declines seen in the first half, as the end of rate hikes started to be factored in.

In the latter part of 2023, when a surge in gold prices, there was general awareness that the Federal Reserve intended to lower rates in 2024. At the same time there is an increase in geo-political tensions to deal with. This anticipated shift enhances the allure of gold, given the inverse relationship with falling interest rates. The decline in interest rates results in reduced yields on short-term government bonds, a secure asset competing with gold, thereby augmenting the precious metal's attractiveness. Additionally, this shift leads to lower returns on cash, pushing investors to actively seek more attractive alternatives. When interest rates fall due to an economic slowdown or recession, stocks often perform poorly, and the economy is still at recession risk. Furthermore, the United States presidential elections in November 2024 contributed to heightened political uncertainty, further elevating gold prices. These factors collectively constitute the primary drivers behind the heightened demand for gold experienced throughout the second half of 2023.

Gold prices were supported by sustained demand from Central Banks in response to ongoing economic tensions. Central banks robustly accumulated gold reserves, acquiring approximately 800 tonnes in the first three quarters of 2023, reflecting a 14% increase compared to the corresponding period in the previous year. Projections suggest a strong total annual demand for gold in 2023. In 2022, central banks increased their purchases also by 152%, to over 1.136 tons.

On the investor front, the latter part of 2023 witnessed significant capital inflows into gold. This surge could be attributed to a strategic move by investors seeking to hedge against inflation, which remained above its target and experienced a rebound in both Europe and the US in December 2023. It may also be a pre-emptive response to a potential economic downturn (soft and short recession) and anticipation of Central Banks implementing rate cuts in the coming year. Investors were looking to protect themselves from stubborn inflation, a possible recession, geopolitical tensions and increasing default risks in the financial system.

In summary, gold demonstrated resilience throughout the past year, proving to be a reliable hedge in various scenarios. Whether in response to the conflict in Ukraine and Russia, attacks by Hamas on Israel, increasing inflation, declining real rates, or the Federal Reserve's indication of expected rate cuts in 2024, gold saw price increases, reaching record levels in certain instances. This diversity of scenarios highlights gold's versatility as a hedge.
Where are we in the Global Macro Cycle?

An important consideration for any gold investor is an assessment of the Global Macro Cycle (shown below) and where we reside within such an environment. The consideration of where we are in any economic cycle is a fundamental basis of our overall investment analysis using our Macro, Valuations, Sentiment and Technical framework (“MVST”). Our analysis of this cycle shows that we have started to enter the phase where inflation is falling (from a high level), growth (possibility of recession) overall is low with the central banks looking to maintain rates (or start cutting them) and there are many tensions such as in Ukraine, Israel, and Taiwan. As such we consider this to be a good moment to invest in gold, it is a good asset during tension periods and low growth such as the current.
2024 – gold outlook.

In 2023, gold prices concluded the year on a strong note, achieving all-time highs and closing with a 13% gain. The outlook for the current year remains optimistic, driven by the anticipation of declining real interest rates amid falling inflation and a shift by the Federal Reserve towards a dovish policy, thereby increasing gold demand. The trajectory of gold in the upcoming months will be significantly influenced by Federal Reserve policy.

Recent data from the US and EU signals a decrease in inflation (with a rebound in December 2023) and a general cooling of the economy. However, 2024 may bring further inflationary pressures, especially if tensions escalate in the Strait of Hormuz and the Red Sea (Suez Canal). Persistent high budget deficits in the US and an upcoming contentious presidential election add to the uncertainties. Both economies, particularly Europe, remain at risk of recession, prompting investors to shift from risk assets to safer options such as gold. Market forecasts in the US hint at a potential rate cut in March, a prospect the Fed (and us) deems unlikely. However, we believe that cuts may not materialize until at least the second half of the year. The cut rates expectations provide support for a bullish trend in gold.

Central banks have consistently increased their gold reserves, acquiring approximately 800 tonnes in the first three quarters of 2023—a 14% increase from the same period the previous year. This trend suggests a robust total annual demand for gold in 2023, continuing the momentum observed over the past two years. In 2022, not only was it the thirteenth consecutive year of net purchases, but it also witnessed the highest level of annual demand on record since 1950. Furthermore, central banks, acting as net buyers also in 2024, are expected to purchase between 450 and 500 tons in the upcoming year. This positive trend is complemented by strong investment demand from ETFs, which have witnessed substantial increases in assets over the past year. Investors were looking to protect themselves from stubborn inflation, a possible recession, geopolitical tensions and increasing default risks in the financial system.

In summary, potential factors leading to gold outperforming such as a weaker-than-expected economy prompted more aggressive cuts by the Fed. Additionally, there is a risk of further escalation in geopolitical tensions, whether in the Middle East or the conflict between Russia and Ukraine. The broader outlook for 2024 is characterized by economic tension, a slowdown, geopolitical conflicts, wars, and the potential decreases in real rates resulting from rate cuts and reduced inflation.
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