After a false start to the years 2022 and 2023, gold enters the new year once again in a favorable position with buyers in control. And while some investors worry that 2024 will witness a repeat of the last two years (which saw gold’s uptrend failing after a good start), the evidence suggests the gold bulls can maintain control this time around.
At the start of the current year, it looked like gold was poised to deliver solid gains for holders of the metal. Several key factors were in place that normally ensure higher prices for the precious metal, including Treasury bond yields that were stabilizing and a weakening U.S. dollar index. Additionally, inflation expectations were still high, providing gold with an additional shot of adrenaline early in the year.
Fast forward to late December and the same factors are at play: the dollar is weakening while T-bond yields are falling. And while the overall U.S. inflation rate is declining, retail food and shelter prices (two of the biggest expenditures for most consumers) remain high, providing many investors with a sense that higher living costs are still a concern going forward.
That said, what’s to prevent 2024 from turning in another performance like the last two years when the yellow metal started well but ultimately fizzled out after the first few months? The answer to that is interest rate expectations.
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Expectations are rapidly shifting concerning the Fed’s benchmark heading into the new year. Unlike last year, in which the market fully expected the Fed to continue hiking the Fed Funds rate, there’s now a growing belief that rates are finally going to come down. Indeed, the interest rate futures market is predicting there will be four to six rate cuts in 2024, amounting to a quarter of a percentage point for each cut.
This is an important consideration for gold bulls since the precious metal’s price has tended to benefit from falling interest rates in the last two decades. Conversely, periods when the Fed Funds rate consistently increased were often marked by a struggling gold market.
Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, December 27, 2023.
However, it has been pointed out that over the longer term, gold doesn’t always trade inversely vis-à-vis the Fed Funds rate. In the late 1970s, for instance, when interest rates were soaring into the double digits due to runaway inflation, gold had one of its best performances in memory. By contrast, the deflationary period of the credit crisis era also benefited gold.
So, if it isn’t inflation or deflation—and the corresponding rate increases/decreases that accompany it—what is it that ultimately determines a rising price for the metal? In short, it’s anything that potentially threatens the corporate profit outlook.
When investors worry that rapidly increasing inflation will undermine consumers’ ability to spend more, they often hedge their stock holdings by buying gold. On the other hand, when interest rates are declining and there’s a corresponding fear that this indicates a weaker aggregate demand outlook, gold is typically the go-to for participants who want to hedge against that outcome as well.
At the present time, gold has the unique advantage of being bolstered by both lingering inflationary concerns and the prospect of falling interest rates. And as we head into what promises to be an eventful U.S. presidential election year, gold should further benefit from the economic uncertainty and increased financial market volatility that often accompanies such major election years.
All told, I expect gold to deliver a strong performance in 2024, primarily based on the likelihood that interest rates will reverse in the next several months. If you’re interested in having some exposure to it without actually storing the physical metal, listed gold-backed funds like the GraniteShares Gold Trust (BAR) or the Sprott Physical Gold Trust (PHYS) are good places to start.
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