While gold has already had an exceptional year in 2023, defying expectations amid high interest rates and outperforming commodities, bonds and most equity markets, the World Gold Council still sees a strong case for strategic investment going into the new year.
In its 2024 outlook published on Thursday, the WGC said heightened geopolitical tensions in a key election year for many major economies, combined with continued central bank buying, could provide additional support for the yellow metal.
Furthermore, the likelihood of the Federal Reserve steering the US economy to a safe landing with interest rates above 5% is by no means certain, so a global recession is still on the cards. This should encourage many investors to hold effective hedges such as gold in their portfolios, it says.The WGC report identifies three likely scenarios for the global economy that could determine the direction of gold in 2024。
The first is the market consensus of a Fed-engineered “soft landing”, which the Council says would be a welcome outcome for many investors. However, its execution requires razor-sharp precision from policymakers and also depends on many factors beyond their direct control.
This is also why a soft landing is considered a rare feat; historically, the US Federal Reserve has only managed a soft landing twice after nine tightening cycles over the past five decades. The other seven ended in recession – or a hard landing, which is the second scenario.
A key determinant of whether economic conditions move from a soft to a hard landing is the labour market. While US unemployment remains low, some of the factors that made it resilient in 2023 – such as a tight labour supply and strong corporate balance sheets supported by healthy consumer wallets – have not only faded, but historically tend to reverse quite quickly.
A third, less likely scenario is the “no landing” outcome, characterised by a reacceleration in inflation and growth, driven by a rebound in US manufacturing and a recovery in real wages. However, the WGC noted that this is less an outcome than an intermediate state, referring to Morgan Stanley’s description that “a no landing is just a soft or hard landing waiting to happen”.
From a historical perspective, the first and third scenarios could result in flat to slightly weaker average gold performance next year, the Council said. This time, however, there are two additional factors in gold’s favour: geopolitical risk and central bank demand.
In addition, the probability of a recession is not insignificant. From a risk management perspective, this would strongly support the case for maintaining a strategic allocation to gold in portfolios, the report concludes.
