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Gold had a strong 2023, defying expectations amid a high interest rate environment, and outperforming commodities, bonds and most stock markets. Historically, gold has had a flat performance during consensus-favoured ‘soft landings’; however, geopolitical risks, central bank buying and the spectre of a recession may provide additional support for gold in 2024, according to the World Gold Council.
In its Gold Outlook 2024 report published earlier this month, the World Gold Council said that many economists now anticipate a “soft landing” in the U.S. — the Federal Reserve bringing inflation back to target without triggering a recession — which would be positive for the global economy. Historically, soft landing environments have not been particularly attractive for gold, resulting in flat to slightly negative 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. Further, the likelihood of the Fed steering the US economy to a safe landing with interest rates above five 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," noted the report.
The global economy faces three likely scenarios in 2024, as per the World Gold Council
Economic scenarios, probability of occurrence and key gold drivers*
*Based on market consensus and other indicators. The size of gold drivers represents relative importance within each scenario. Impact on gold performance based on average annual prices as implied by the Gold Valuation Framework.
Just one of the three scenarios—economic expansion without a slowdown in growth—might place downward pressure on gold prices, predicted the World Gold Council. And it only sees a 5 to 10 per cent chance of that scenario playing out.
Far more likely is either a soft economic landing, characterized by slowing but continued economic growth, or a hard landing with a recession, noted the report. With 45 to 65 per cent possibility predicted for a soft landing, WGC foresees gold prices staying flat with upside potential. If indeed there is a hard landing, given odds of 25-55% by the council, gold prices would rise "notably higher," it said.
Regardless of which scenario proves correct, uncertainty in the interim should underpin demand for gold.
The two most significant events for gold demand in 2023 were the collapse of Silicon Valley Bank and the Hamas attack on Israel, said the WGC, estimating that geopolitical events added between 3 per cent and 6 per cent to gold’s price over the year.
The two most significant events for gold demand in 2023 were the collapse of Silicon Valley Bank and the Hamas attack on Israel, the WGC said, estimating that geopolitical events added between 3% and 6% to gold’s price over the year.
Through the third quarter, central banks year-to-date bought 800 metric tons of gold, which is 14 per cent higher than in the same period a year ago.
"And in a year with major elections taking place globally, including in the US, the EU, India, and Taiwan,17 investors’ need for portfolio hedges will likely be higher than normal. Purchases by official institutions have helped gold defy expectations over the past two years. In 2023 we estimate that excess central bank demand added 10 per cent or more to gold’s performance. And they will likely continue buying. Even if 2024 does not reach the same highs as the previous two years, we anticipate that any above-trend buying (i.e. more than 450–500t) should provide an extra boost," said the report.
Economic scenarios and factors that impact on gold based on key drivers*
In 2023, COMEX Gold prices are set to conclude the year with a gain of over 11 per cent, and MCX Gold prices have yielded a return of nearly 12 per cent year-to-date. According to Kotak Securities, this performance is partly due to the depreciation of the domestic currency. Despite challenges such as surging bond yields and a robust US dollar, gold prices demonstrated resilience throughout the year, notably in the face of the Federal Reserve's decision to raise interest rates to a 22-year high.
