Can anyone dispute that this has been one of the more challenging cycles of chronic inflation and higher interest rates in our history? For the past 2½ years, year-over-year inflation has remained stubbornly above the Federal Reserve’s 2% target, at one point reaching north of 9% – it’s highest rate in more than 40 years. As for the focused interest-rate hikes the Federal Reserve began deploying in March 2022 to rein inflation in, those have been ratcheted up at the fastest pace in the last four decades.
And to be sure, both price pressures and higher rates remain prominent issues. Although inflation has been steadily decelerating overall since June of last year, both the headline and core consumer price indexes (CPI) are still above 2%. In fact, CPI accelerated from 3% in June to 3.2% in July, while annual core CPI last month landed well above that at 4.7%. Inflation may well be in the midst of a slow deterioration, but the operative there is “slow.”
Then there are interest rates. Just as inflation seems to be abating but is nevertheless still a problem, the higher interest rates that have been its companion for the last year and a half also remain very much intact. The fed funds rate has been raised 525 basis points since last March, bringing the fed-funds target range to 5.25% to 5.50%, its highest level in 22 years.
All things considered, then, it’s too soon to declare that the absolute end of this particularly difficult inflation-and-higher-rate cycle is upon us. Still, it’s not too soon to suggest we may be approaching the end, at least, and ponder what might come next. On that note, analysts now are suggesting an increasing likelihood that what lies ahead for monetary policy could be a much more accommodative phase.
Fed policymakers’ most recent projections, noted at the June meeting of the Federal Open Market Committee, suggest that, at this point, we very well could see one more rate hike this year. But that was June. Two months later, with inflation pressures continuing to relent, an increasing number of observers are saying that while we may not see any overt easing this year, actual rate hikes could be done.
“It remains the case that the Fed is likely done with rate hikes for this cycle,” Thomas Simons, economist at global investment bankers Jefferies, declared last week.
CME Group’s FedWatch Tool, which analyzes the probabilities of changes to the fed funds rate, currently suggests the same thing. Right now, the economic model says there’s a 90% chance the central bank will leave rates unchanged at its next policy meeting in September. And looking further out, the model ascribes a 60%-or-better chance that the fed funds rate will be right where it’s at now – or even lower – in the months that follow.
If rate hikes are indeed finished, can rate cuts be far behind?
Not according to several of the world’s global banking giants. Earlier this week, Goldman Sachs projected that even if a recession does not come to pass, a “desire to normalize the fed funds rate from a restrictive level” will prompt the Fed to start cutting in the second quarter of 2024. For their part, Wells Fargo and Bank of America also forecast rate cuts kicking off in Q2 2024.
The prospect of rates moving lower in 2024 is cuing renewed projections for better gold prices next year. It seems, in fact, that with each passing day, more analysts are going public with their forecasts that 2024 should be a particularly good year for the yellow metal.
Recently, I wrote about J.P. Morgan’s optimistic outlook for gold next year. But it turns out the analysts at the world’s largest investment bank are by no means the only ones expecting the gold bull to return to his feet in 2024. As it happens, there’s no shortage of especially robust forecasts of gold’s anticipated performance over the next 12 to 18 months.
This week, we’re going to get up to speed with what these other analysts are saying and why they’re saying it. To be sure, some even have particularly optimistic specific price targets in mind for gold. We’re going to focus less on those, however, and more on something I think is perhaps greater potential value: understanding the foundational, fundamental bases for why they think gold is shaping up to have a particularly shining year in 2024.
The analyst community believes multiple factors – including the widely anticipated pivot back to accommodative monetary policy in 2024 – will provide a substantial tailwind for gold through at least the end of next year. Some, such as Bart Melek, managing director and global head of commodity strategy at TD Securities, think the run-up to gold achieving never-before-seen prices could begin as soon as later this year.
“I do see gold move above $2,100 in late 2023, early 2024 as a trading level,” Melek said recently. “I am positive on gold as I believe that the Fed will tilt policy away from its current restrictive mode. This I believe will happen before the 2% inflation target is reached.”
As for how high above $2,100 Melek expects to see a reenergized gold bull climb, Melek doesn’t say.
David Neuhauser, founder of Livermore Partners, an institutional asset manager specializing in alternative assets, is one of those analysts. He’s forecasting gold reaching around $2,500 per ounce by the end of 2024, which would represent a near-30% increase over current levels.
Notably, as with TD Securities’ Bart Melek, Neuhauser expects elevated inflation to remain a feature of the economic landscape even as the Federal Reserve shifts back toward a more dovish monetary policy stance. The precious-metals implications of rate cuts being enacted even as inflation remains above the central bank’s 2% target have the potential to exert an especially positive effect on the price of gold.
Analysts at exchange-traded fund (ETF) giant WisdomTree also are considering scenarios they say could see the dollar-per-ounce price of gold rise to the mid-2000s.
According to Nitesh Shah, head of commodities and macroeconomic research for Europe a WisdomTree, the “consensus” 2024 forecast for inflation (declining but still above target), dollar strength (weakening) and Treasury yields (falling) suggests gold north of $2,200 in some measure by the second quarter of next year. Shah adds the if lingering recession fears prompt the Fed to adopt a more aggressive rate-cutting posture, look for gold to land closer to the around-$2,500 price projected by Livermore’s David Neuhauser.
Stronger gold next year also is projected by Heng Koon How, head of markets at Singapore multinational United Overseas Bank. How expects to see gold stretch above its current high by Q2 2024, although his projections don’t have the price reaching as high as Neuhauser and Shah potentially envision it going.
As with the other analysts, How expects the most powerful forces benefitting gold to be a change in the direction of monetary policy and resulting dollar weakness.
“Key driver in our positive outlook for gold is anticipated peak in Fed rate hiking cycle as well as upcoming topping out of US Dollar strength,” How recently told CNBC.
But in his comments, How referenced another reason for his optimistic metals outlook: the “consistently strong” record of ongoing gold purchases by the world’s central banks.
To How’s point, although central banks did slow their gold-buying activity in the second quarter, the outlook for the consumption of gold by central banks and governments remains upbeat. And as it does, that could translate to the world’s central banks continuing to act as another reliable source of energy for the yellow metal, going forward.
Fiat currency may be the “central” reason why central banks are so important, but there’s been some compelling evidence over the last decade-plus that it’s none other than gold to which those same central banks will turn when they want to hedge their reserves. And as this trend toward greater reliance on gold appears as though it could continue for the foreseeable future, it suggests – as both United Overseas Bank’s Heng Koon How and J.P. Morgan recently noted – the possibility that central banks could be an increasingly prominent driver of gold prices over the near term.
During what many would surely agree was an economically volatile 2022 across the globe, the world’s central banks were net purchasers of 1,136 metric tons of gold – the highest calendar-year total on record.
Admittedly, one year – even an all-time-record year – does not suggest a long-term, more secular embrace of gold by central banks. But what might suggest such an embrace is that last year was the 13th straight year that central banks have been net purchasers of gold.
And that high demand for gold among central banks has continued into this year. Even though gold demand dropped both quarter over quarter and year over year in the second quarter, central banks through the first half of 2023 still accumulated more gold than in any preceding first half going back to 2000.
This “macro” trend toward accumulating gold is anticipated to continue. According to the World Gold Council’s 2023 Central Bank Gold Reserves Survey published mid-year, 70% of central banks surveyed said they expect global gold reserves to rise over the next 12 months – an even larger percentage than reflected in last year’s survey.
Another recent survey of central banks and sovereign wealth funds also suggests the coming years will see governments hold gold in higher regard. The research, conducted by asset manager Invesco, found that slightly more than 40% of respondents expect to increase their allocations to gold over the next three years.
The greater priority that central banks and governments are giving to gold is suggested additionally by the fact that nearly 70% of respondents also said they are keeping their metals assets at home, rather than allowing them to be stored anywhere outside of their national borders. That’s a sizable increase over the 50% of respondents who said three years ago they were keeping their gold at home.
We can’t be certain, of course, that central-bank demand for gold will continue to remain as acutely high as it’s been. But even if central banks don’t maintain a record level of gold demand, the evidence suggests at least the potential for central banks to play a material role in pushing gold prices higher into next year.
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