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Back in June, we concluded that the US Federal Reserve was at a crossroads as it approached the end of its rate hiking cycle and began to put the brakes on its monetary tightening. While global inflation has been somewhat ‘tamed’ compared to the double-digit figures of early 2023 and growth has been relatively shallow in developed markets, we have all witnessed another turbulent year across financial markets and the world economy.
Today, we believe that the path ahead is likely to remain as volatile and challenging as the period before. Looking into next year, there are a number of hurdles that gold markets face as we navigate a period of heightened geopolitical risk, central bank trade-offs, and the spectre of increasingly polarised elections across developed economies. Perhaps, Margo Channing says it well in the hit 1950s classic ‘All About Eve’: fasten your seatbelts, its going to be a bumpy night.
For gold investors, 2023 has been a year of strong price swings, leading to an all-time record high in early December. Many are now watching to see if 2024 will bring with it a strong rebound in the global economy and the end of ‘higher for longer’ interest rates. History tells us that rate cuts favour non-yielding assets such as gold. However, the learning from recent years is that nothing is clear cut. We answer three questions dominating the minds of gold investors and traders as we move into next year.
How Will Central Bank Activity Impact Gold Prices?
Central bank signal and decision-making had a dramatic impact on the price of gold in 2023, hitting prices over the summer and lifting markets in recent weeks. However, central bankers face a number of trade-offs as we go into next year. Growth in the US and UK is sluggish, and the Eurozone is on the brink of recession. Inflation remains above target levels across numerous developed countries and many believe that rate hikes haven’t fully filtered through to the labour force. While rate cuts in the middle of 2024 could spell growth, central bankers will be acutely aware of inadvertently triggering an inflation bounce back. After a slew of shocks in recent years, from the global pandemic to a European energy crisis, central bankers will be wary of being wrong-footed once again by emerging risks.
For investors, many believe that rate cuts favour non-yielding assets such as gold. However, this correlation has not always been proven. In the 1970s, gold increased rapidly despite US interest rates also increasing. Yet, in 2022, gold entered a downward trend as rates increased and investor appetite for fixed income assets increased. Ultimately, while monetary policy has a significant impact on gold’s movements, it is worth being aware that other forces are at play in gold markets. Some believe that supply and demand is a larger force in gold markets. While trading in early December suggests potential rate cuts will lift prices, the jury remains out on whether this will materialise next year.
What Do The Elections Hold In Store For Gold Markets?
In 2024, it is likely that there will be elections taking place simultaneously both in the UK and US – such an event has only happened twice since the end of the Second World War (in 1964 and 1992) . Elsewhere, elections will further take place in Taiwan, Russia, South Africa, and in the European Parliament as voters go to the polls in the biggest election year ever. Recent seismic election results and geopolitical tensions and shifts mean 2024 could be pivotal for the global economy and asset prices.
Early opinion polling suggests that we could see a change in leadership in both the UK and the US next year.[1][2] Against the backdrop of war in Europe and the Middle East as well as a fragile macro-economic picture, leadership change could increase market volatility and uncertainty.
During periods of political upheaval, we have seen more investors move into ‘safe haven’ assets such as gold to shield their investment portfolios and navigate risks. Moving into next year, markets are now looking closer at geopolitical risks than earlier this year when many saw a stalemate emerging in Ukraine.[3] Historically, this has pushed prices up as investors have taken a more active approach to their portfolios. Yet, investors should be wary that gold often stabilises in price as more information, and therefore more certainty, emerges.
In the UK, this appetite for gold may be particularly pronounced in the bullion coin market. Due to their status as legal tender, profits made when selling bullion coins manufactured by The Royal Mint are exempt from Capital Gains Tax in the UK. From April 2024 the Capital Gains Tax threshold is set to be reduced to £3,000 for most investors – down from £12,300 in 2022/23. The combination of political uncertainty and the lower CGT threshold may boost demand for gold coins amongst Brits.
What Other Factors Will Impact Gold Prices Next Year?
Going into 2024, there are many headwinds and tailwinds impacting gold prices. In the third quarter of this year, central banks collectively bought 337 tonnes of gold; the second highest third quarter on record according to the World Gold Council.[4] Global financial markets closely scrutinize buying patterns of central bankers as their purchasing habits can have a cascading effect, impacting the supply-demand balance as we see with other commodities. A lot of this buying has been politically motivated by the BRICS countries (Brazil, Russia, India, China and South Africa) and their allies looking to diversify away from the US Dollar.
Elsewhere, as gold is denominated in US Dollars, the price of the dollar can have a significant impact on the value of the precious metal. For UK investors, if sterling is weaker against the dollar, this can lead to investment gains for those holding gold. Likewise, if sterling is stronger against the dollar, investors can buy more gold with the same amount of their currency. In 2024, as Fed interest rates potentially change over the summer period, markets will be closely watching the value of the dollar as an indicator for gold price movements.
Our View On Precious Metals Markets Next Year
The potential for central bank rate cuts in 2024 is boosting the gold and precious metals market, as the prospect of lower rates boosts demand for non-yielding assets. Traders and investors are increasingly pricing in a Fed rate cut some time in 2024, which could accelerate the price of gold alongside a weakening of the US dollar. The dual impact of this move could turbocharge gold beyond recent market highs, as recent geopolitical and economic uncertainty, alongside strong central bank gold buying, has kept precious metals markets elevated. 2024 is also shaping up to be a record year for elections worldwide, with more people than in any other year having the opportunity to cast a ballot. With elections in the US, EU, India, Russia, South Africa, Taiwan and potentially the UK, we could see unexpected shifts in geopolitics. The lesson of recent years is that nothing is clear-cut, particularly in volatile
markets, which remain unpredictable. Investors should consider how they are protected against this uncertainty and prepare their portfolio accordingly.
At The Royal Mint, we have welcomed tens of thousands of new investors in recent years who are starting their investment journey in precious metals. Gold and other precious metals are increasingly becoming a mainstream choice for investors who are looking to diversify their portfolio and hedge against inflation. Find out more about gold investing here: https://www.royalmint.com/invest/get-into-gold/
References:
- Ipsos | December 2023
- CNN | December 2023
- BlackRock Geopolitical Risk Indicator | October 2023
- World Gold Council | October 2023
The contents of this article are accurate at the time of publishing, are for general information purposes only, and do not constitute investment, legal, tax, or any other advice. Before making any investment or financial decision, you may wish to seek advice from your financial, legal, tax and/or accounting advisers.
