Gold has increased by over 11% so far this year, firmly holding prices above critical $2,000-per-ounce levels since mid-November. The precious metal is now flirting with its record high achieved in 2020, sitting just a few dollars away from the boundary. On November 29, gold futures achieved a yearly high of $2,064.70 per ounce, reflecting a 3.04% gain in the last month alone amid rising Israel-Gaza tensions.
All performance peaks lead to downturns, though analysts believe gold is nowhere near topping out yet. Experts at the Canadian investment bank TD Securities forecast gold to push above $2,100 per ounce as we enter the new year with the headwinds from high interest rates, U.S. dollar strength, and high bond yields finally receding.
Analysts from TD Securities recently provided a 2024 gold outlook, predicting that gold would achieve an average of $2,019 per ounce during 2024. The analysts expect most of gold’s successes to come by the second quarter of the year once interest rates begin dropping. Because of this, TD Securities warns investors to be patient on expected returns.
“With inflation still considerably above the Fed’s two percent target, the U.S. central bank is unlikely to signal an imminent easing. As such, the yellow metal could well be range-bound without a sustained breakout toward our $2,100 target occurring for a quarter or so,” TD Securities explained in the report.
While inflation may have dropped from the 40-year high seen in June of this year, levels still remain significantly above the Federal Reserve’s preferred 2% range. In the last 12 months going through October, the inflation rate hit 3.5%, according to the Personal Consumption Expenditures price index, which the Federal Reserve uses to gauge inflation.
Because of these stubborn inflation levels, TD Securities believes interest rates could stay high for as long as the first half of 2024. At the same time, analysts believe that if the Federal Reserve keeps rates high for too long, the committee increases the risk of sparking a recession.
TD Securities actually forecasts a high likelihood of the U.S. economy falling into a recession by the second half of next year, the only question is how severe the recession will be. High risks of a recession would force the Fed to enact more dovish monetary policies.
According to CME’s FedWatch Tool, the first month that the probability of a rate cut is higher than that of a rate hike is May 2024, with the odds of a rate cut at over 75%. This tool is betting on a rate cut of 100 basis points.
Analysts at TD Securities forecast that the central bank will cut rates by 250 basis points to potentially lessen the impact of the incoming recession. Either way, high rates increase the opportunity costs of investing in non-yielding assets, like gold, so the sooner rates decrease, the sooner gold can enjoy higher returns.
“We see investor interest reemerge once it becomes apparent the US central bank is ready to pivot to a less hawkish stance. This should trigger short covering and new long extensions, which have a lot of room to run,” TD Securities analysts explained.
Regardless of Federal Reserve actions, TD Securities expects gold to continue performing well, given its support from central banks. At the same time, the tensions in the Middle East have spiked safe-haven demand, allowing gold to gain over $200 per ounce in the last two months alone since the initial attack on Israel occurred.
Furthermore, World Gold Data Council data shows that central banks are on track to meet last year’s record-breaking gold purchase levels or potentially set the bar even higher. In the first nine months of this year, central banks had already purchased 800 tons of gold, meaning we are just 336 tons short of last year’s record. The fourth quarter typically shows the strongest buying rates, so nations like China, Poland, India, and Singapore may just bring the total beyond 2022’s astonishing level.
“We believe the official sector will continue to be supportive in the months to come and should be a catalyst for our $2,100+/oz sustained price projection next year. These physical purchases will be very important when the Fed pivots to a less restrictive policy, which should remove the high cost of carry as a big obstacle to discretionary traders,” TD Securities explained.
Moving forward, traders can continue analyzing Fed policies and central bank actions to assess how gold may perform. As always, investors should consult their advisors before making any portfolio decisions.