CUR - Gold's Demand Profile Suggests A Strong 2024 Ahead

2023-12-03 03:50:46 ET

Summary

• Gold has seen a significant improvement in its fundamental backdrop, leading to a sustained run-up in the coming months.
• Bullish end-year rallies and solid performance in December indicate a positive outlook for gold in the first two months of 2024.
• Institutional interest in gold is increasing, with big banks like Goldman Sachs stating that gold's "shine is returning.".

After a shaky fourth quarter start, gold has taken flight on the back of a massive improvement in its fundamental backdrop. And unlike the previous major bull run earlier this year, the precious metal’s key factors are favorable for a sustained runup in the coming months.

Last week’s move to new highs for gold marks the first closing high the metal has made since March 2022, with the front-month futures hitting an all-time record of $2,091 an ounce to start the month of December. This development by itself is significant since bullish end-year rallies in gold bode well for the first two months of the New Year, with January-February typically being the best time of the year for the yellow metal to rally from a seasonal standpoint.

Gold’s bullish tendency in the opening months of most years tend to be especially vibrant when it closes out the month of December with a fairly solid performance. The month has only just started, but the prospects are bright that gold will finish the year with its best 12-month performance since 2020, in turn paving the way for a solid start for 2024.

Continuing to build on its recent momentum is imperative for gold which, as a cyclical commodity, is vulnerable to sudden shifts in investor sentiment that can invite unexpected trend reversals. Indeed, gold’s strongest showings in the last decade have occurred when institutional interest in the metal accelerates (as it now is).

The latest evidence of big banks showing interest in gold was last week when analysts at Goldman Sachs released a client note stating their take on the market by observing that gold’s “shine is returning.”

Goldman went on to assert that gold’s upside potential “will be closely tied to U.S. real rates and dollar moves,” adding that it expects “persistent strong consumer demand from China and India, alongside central bank buying…”

Meanwhile, Fed watchers have arrived at a strong consensus that the U.S. central bank will likely cut its benchmark fed funds rate by next June. Underscoring this conviction are the latest readings in the CME Fedwatch Tool , which suggests there will be at least two rate cuts over the next 12 months. This has prompted some institutional analysts to raise their price guidance for gold in beginning around the second quarter of 2024.

However, with next year being a U.S. presidential election year—and thus having massive political ramifications—there is an equally strong possibility the Fed will surprise the market by dropping benchmark rates in the first quarter of 2024. This is the contention of the billionaire hedge fund manager Bill Ackman, as mentioned in a recent Money.com article .

Ackman elaborated that as the domestic rate of inflation subsides, rising real rates of interest (i.e. inflation-adjusted interest rates) will force the Fed to cut its own benchmark rate in order to prevent “real risk of a hard landing” for the economy.

Non-yielding gold, of course, typically feeds off falling rates as the competition from rising rates fades. Moreover, gold’s fundamental attraction as a safe haven is increasing by the month as geopolitical and global economic events converse to create uncertainty about the financial market outlook among investors. One of the bigger worries right now involves China’s weakening economy, as that nation’s manufacturing activity contracted for a second straight month in November, prompting fears that its economic weakness could spread to other parts of the globe. China’s index for its services sector activity fell under the 50 level for the first time since a year ago, which underscores its faltering economy.

This is a good news/bad news situation for China, as my colleague Michael Brush of Cabot Wealth Network has noted . He wrote, “China’s economy is in trouble, which limits its desire for foreign military entanglements.” While on the surface this may seem to be a negative development for gold by virtue of it relieving a layer of geopolitical worry, it still adds another dimension to gold’s “fear factor” now that the world’s second-biggest economy is weakening.

Additionally, China’s central bank has been on a gold-buying spree, as evinced by its twelfth consecutive month of increasing its gold holdings as of October. Many analysts see this as part of a broader national strategy to move China away from dollar-based assets, allowing it greater autonomy and flexibility with less dependence on the U.S. currency. This is yet another layer behind gold’s proverbial “wall of worry” and a reason why the metal’s demand has increased among safety-conscious investors.

All told, the outlook for gold heading into 2024 is as bright as it has been in at least the last four years (when Covid-related fears pushed the metal to record highs). Continued military conflagrations in the Middle East and Eastern Europe, economic recession fears and the increasing likelihood of lower U.S. interest rates have converged to make gold a high-probability candidate for higher prices in the next few months ahead.

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