Gold prices achieved an all-time record high on Monday during early-day trading when the precious metal soared above $2,100 per ounce, touching $2,110.8 before settling around $2,090 per ounce, still well above the previous record. Gold prices have been rising for two consecutive months now, in line with the increasing conflicts in Palestine and Israel, boosting safe-haven demand. Analysts expect gold to remain above $2,000 per ounce throughout next year as interest rates begin dropping and geopolitical tensions remain high.
Analysts from the United Overseas Bank expect gold to maintain its recent upward trend, potentially achieving new highs next year. Gold began its latest price climb on October 7 at around $1,830 per ounce and has since climbed over $200 since the first attack on Israel. In the last two months, safe haven demand has skyrocketed as traders around the globe fear a widespread conflict.
Meanwhile, expectations over future interest rate cuts have made gold more appealing to investors. According to CME’s FedWatch Tool, we have over a 57% chance of a rate cut in March. With interest rates potentially dropping and the U.S. dollar losing value, gold can perform exceptionally well.
“The anticipated retreat in both the USD and interest rates across 2024 are key positive drivers for gold,” Heng Koon How, the Head of Markets Strategy, Global Economics, and Markets Research at UOB, explained in an email interview with CNBC. How forecasts gold prices to reach $2,200 per ounce by the end of next year.
Another key factor driving gold prices right now is central bank demand. World Gold Council data shows that around one-quarter of the globe’s central banks plan to increase their gold reserves in the next year as the U.S. dollar continues losing value and fewer nations want to rely on a crumbling currency.
“This means potentially higher demand from the official sector in the years to come,” Bart Melek, the head of commodity strategies at TD Securities, explained. Malek expects gold prices to begin averaging around $2,100 per ounce by the second quarter of next year as strong central bank demand provides critical performance support.
Even just one key player in the central bank gold-buying spree, China, has the potential to reshape the entire market. Currently, China has around 4% of its reserves allocated to gold. For comparison, the United States allocates over 60% of its reserves to the precious metal.
The People’s Bank of China has spent the last 12 months stockpiling gold, purchasing around 266 tons of gold during that time period. If China were to increase its reserves even to just 10%, the nation would be in the market to purchase 3,000 tons of gold.
Central banks, as a whole, are on track to meet or exceed the record-breaking gold purchase levels set last year as well. Central banks purchased 800 tons of gold during the first nine months of the year and will only need to add a little over 300 tons during the fourth quarter to beat last year’s record.
Aside from central bank support, though, Malek sees that the Fed’s monetary policy shift in 2024 may be gold’s largest catalyst. Low interest rates typically weaken the U.S. dollar while supporting gold buying. A softer dollar also makes it cheaper for international buyers to invest in gold, ultimately spiking demand.
The rate-hiking cycle began in March of this year as inflation spiked to rates not seen in the last 40 years. With this extreme level of inflation, the Federal Reserve enacted a hawkish strategy that reduced gold’s appeal as high rates dampened the opportunity costs of investing in non-yielding assets. As we’re finally reaching the end of this cycle after multiple months in a row of paused rates, gold is enjoying substantial gains that will likely only be amplified after the first rate cut.
On November 29, Federal Governor Christopher Waller explained that he envisioned easing rates in the next three to five months as inflation data shows dropping levels. This statement prompted analysts to forecast a spike in gold prices, which immediately came true as traders likely flocked to the commodity with high hopes of low rates coming soon.
“We believe the main factors buoying gold in 2024 will be interest rate cuts by the U.S. Fed, a weaker U.S. dollar, and high levels of geopolitical tension,” BMI, a Fitch Solutions research unit, explained in a recent note.
As always, investors should consult their advisors before making any portfolio decisions.
