Despite some considerable changes, 2023 was ultimately a “brilliant” year for gold. A troy ounce was over 13% more costly than at the start of the year just after Christmas, at roughly US$2,068. Also, gold was temporarily more precious than ever on December 4 at US$2,135 per ounce.
As a result, the precious yellow metal has lived up to its reputation as an inflation hedge and crisis currency under challenging times. This outcome is especially noteworthy in light of the US Federal Reserve’s longer-than-expected interest rate rises, which resulted in much higher yields on US government bonds and a rise in the US currency. Two developments that do not help the gold price. As a non-interest-bearing asset, gold often loses value as interest rates rise, mainly when bank deposits provide a much larger return than the inflation rate.
As the US dollar rises in value, gold sold in US dollars becomes more costly, making it less appealing to investors in other currencies.
Motivated by the potential of lower interest rates
On the other hand, central banks were in a purchasing mood, which undoubtedly helped to the rise in the value of gold in 2023. While monetary authorities sold gold for three decades after the Bretton Woods system collapsed, they started to restore their stockpiles during the 2008/2009 global financial crisis.
Central banks purchased about 800 tonnes of gold in the first three quarters of 2023, the highest ever. The gold price’s fantastic performance was not least attributable to the US Federal Reserve, which pronounced the interest rate hiking cycle to be ended at its last meeting in 2023, signalling the possibility of numerous interest rate decreases in the future year. Meanwhile, numerous Federal Reserve officials have attempted to temper these expectations. They were, however, unable to persuade the markets.
This is because an interest rate reduction of roughly 1.5 percentage points is still predicted by the end of 2024. The possibility that the US monetary authorities would drop its benchmark interest rate by 25 basis points as early as March has lately grown to more than 70%, according to the Chicago Mercantile Exchange’s FedWatch forecasting programme. In addition to economic growth and labour market trends, the US Federal Reserve considers inflation when formulating interest rate decisions. In November, the core PCE index, which is especially crucial for this, decreased to 3.2 per cent. This was the lowest yearly inflation rate rise since April 2021.
Observers predicted 3.3 percent, up from 3.4 percent in October.
The obvious favourite of investors: a lower US dollar could enhance the gold price in the new year. There are various causes for this. For example, a glance at financial history suggests that the dollar frequently trades worse towards the start of an interest rate decrease cycle. Furthermore, some experts predict that the US economy’s growth edge over the eurozone may erode.
The conditions for a further rise in the price of gold remain in place, especially given that global monetary authorities are likely to stay on the buying side. According to the World Gold Council, roughly a quarter of international central banks are considering increasing their gold reserves in 2024.
Some market players even predict a gold rush in 2024.
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Securities disclosure.: I, Beat Süess, have no direct investment interests in any of the companies mentioned in this article.