2023-12-08 16:09:38 ET
Summary
- Gold prices are predicted to exceed $2,500/oz in 2024, with a potential upside of more than 20%.
- Factors contributing to this prediction include potential interest rate cuts, rising geopolitical tensions, and strong demand from central banks.
- Investors can profit from higher gold prices by investing in gold mining stocks with diversified operations, low costs, long mine life, safe political jurisdictions, strong balance sheets, and potential for dividends and share buybacks, and via the Sprott Physical Gold Trust.
Why Gold Prices May Exceed $2,500 In 2024
YCharts
After a strong 2023, the question on many investors' minds is whether gold can sustain its impressive rally and set new record highs.
If the current trajectory holds, gold is on track to end the year with a 10% gain, marking its strongest performance since 2020. This uptick is particularly notable as it significantly exceeds gold's average annual price increase of 6.6% since 2008.
So, is all that glitters gold in 2024?
Looking ahead to 2024, the outlook for gold is pretty bright, with several factors suggesting it could be one of the metal's most prosperous years yet.
First, I discuss why the upcoming year holds such promise for gold prices, my prediction for the gold price, the advantages and drawback to owning a physical gold exchange-traded fund, or ETF, followed by the best way to profit from the upcoming rally.
3 Reasons Why Gold Prices Are Going Higher
1. Lower interest rates
A pivotal reason for a potential surge in gold prices in 2024 centers around the expected shift in interest rates.
Traditionally, gold tends to move inversely to interest rates. As we look ahead, there's a strong possibility that the Federal Reserve will initiate interest rate cuts in 2024, creating a highly bullish environment for gold.
Lower interest rates diminish the attractiveness of holding cash and cash equivalents, such as treasuries and CDs, making gold, a non-yielding asset, more appealing to investors.
Interestingly, gold's current performance is already noteworthy, with prices breaching the $2,000/oz mark despite prevailing interest rates of over 5%. This resilience of gold in a high-rate environment sets the stage for even greater potential once interest rates start declining.
The prospect of rates falling to 4%, then 3%, and potentially lower could significantly amplify gold's allure, driving prices upward in 2024.
2. Rising geopolitical tensions and election year
Gold's reputation as a safe-haven asset often sees it thrive amid global unrest and geopolitical tensions.
This was evident in 2023 when conflicts such as the war in Ukraine and the Israel/Gaza situation spurred a flight to safety, resulting in higher gold demand.
With no imminent resolution in sight for these conflicts, and the potential for escalation, gold's appeal is likely to be bolstered.
The prospect of regional conflicts, especially in the Middle East, which would disrupt markets and supply chains, would likely see investors gravitating towards gold as they move away from more speculative assets.
Election Year: Bullish or Bearish?
Investors should also keep in mind gold's historical performance in U.S. election years, which further underscores its potential for gains in 2024.
Since 1973, gold's performance in election years has varied, ranging from gains of 2.27% to 12.82%.
Interestingly, the outcome of presidential elections also seems to influence gold's trajectory. While Democratic wins have led to an average gold price increase of 1.5%, Republican victories have typically resulted in an average increase of 5.5%, according to Deseret News .
With current polls suggesting a lead for Republican Donald Trump over Joe Biden, this political factor could play a significant role in gold's performance in the coming year.
3. Demand may outpace supply
Global gold production has seen a notable increase over the past decade, rising from 84 million ounces in 2008 to approximately 120 million ounces in 2022. Forecasts suggest this upward trend will continue, with production expected to surpass 124 million ounces by 2024.
Those production figures don’t look bullish for gold at first glance. However, analysts anticipate that 2024 might mark the peak of gold supply, largely due to a decline in recycling activity that is expected to counterbalance the slight increase in mine output.
Demand for gold remains robust as well. In Q3 2023, central bank gold buying remained at a historically high level, nearly matching the record set in the third quarter of 2022, according to The World Gold Council .
Overall gold demand, excluding over-the-counter transactions, was 8% higher than the five-year average for the same quarter.
A significant portion of this increased demand is attributed to central banks, with net purchases totaling 337 tons, making it the third strongest quarter on record, according to the World Gold Council.
To date, demand is up 14% compared to the same period last year, reaching a record 800 tons.
Investment demand for gold, however, has been more of a mixed bag. While bar and coin investment remained steady, gold ETFs have experienced outflows totaling 189 tons this year, marking six consecutive quarters of negative demand.
Looking ahead to 2024, expect continued strong demand from central banks, particularly led by nations like China, Poland, and Turkey. And, I think investment demand will bounce back if interest rates fall.
The sustained central bank interest, coupled with the projected peak in gold supply, could contribute significantly to the upward trajectory of gold prices.
My Gold Price Prediction for 2024
As the headline suggests, I think $2,500/oz is a reasonable price target for gold in 2024. That would indicate an upside of more than 20% from current prices and align the potential annual performance with the remarkable gains seen in 2020.
This prediction is based on the above factors coming into fruition: the Fed cuts interest rates and weakens the dollar, geopolitical tensions rise, and central banks continue to buy gold.
I also think, as a result of the Fed’s actions, lower interest rates on savings products should also help boost retail investment demand in 2024.
It will be much harder to justify keeping your cash in a savings account paying 2-3% interest vs. buying gold, which will likely rise in price by more than that, in my view.
What are the risks?
There are a few risks to this thesis that could lead to stagnant or lower gold prices. Here are a few to consider:
-
Sticky Inflation and More Rate Hikes. We could see gold go lower if the economy recovers while inflation remains steady or increases. A sticky inflation rate would potentially lead to more rate hikes, which could dampen the appeal of gold (Higher interest rates could boost the yield on bonds and other fixed-income investments, making gold less attractive in comparison.)
-
Strengthening U.S. Dollar. Gold prices often move inversely to the U.S. dollar, meaning that if the dollar strengthens against other major currencies, gold could lose its appeal. So, a key risk to consider here is if other major currencies see their values fall relative to the U.S. dollar. That would make gold more expensive for buyers in U.S. dollars, potentially reducing demand.
-
Reduction in Geopolitical Tensions. While geopolitical unrest has historically boosted gold's safe-haven appeal, a resolution to key conflicts in Ukraine or the Middle East, or at least a reduction in global tensions, could decrease the demand for gold.
Finally, another risk to consider (albeit, a less likely one) is the potential for more gold supply to hit the market than expected, such as a hike in gold recycling or unanticipated boosts to mining output (due to major new discoveries or improvements in mining rates).
How to profit from higher gold prices in 2024
Gold ETFs
I think the best gold ETF to buy is the Sprott Physical Gold Trust ( PHYS ).Here's a few reasons why:
- Unlike some other gold investment vehicles, this trust actually holds physical gold bullion, not contracts to purchase gold. I believe this provides investors with direct exposure to the price of gold without any of the complexities or risks associated with owning other ETFs.
- In addition, PHYS provides a unique feature where large investors have the option to redeem their shares for physical gold, which is a nice option if desired.
- The Trust's physical gold is held in custody by the Royal Canadian Mint, which is a highly respected and secure institution operated by the Government of Canada.
On the downside, holding the PHYS will cost you, with a current net expense ratio of just over .40%, or $40 per $10,000 invested.
Gold miners
There are several better alternatives to owning physical bullion or investing in gold ETFs.
Gold mining ETFs, though convenient, may include underperforming stocks, diluting potential gains. For example, the VanEck Gold Miners Index ( GDX ) is up only 3% year-to-date, but several standout performers - such as Eldorado Gold ( EGO ) and Alamos Gold ( AGI ) - have exceeded those gains by 10x or more.
A more targeted approach involves investing in gold mining stocks, but selecting the right ones is crucial.
Gold Miners: 7 Things to Look For
-
Diversified Operations: Opt for miners operating multiple gold mines. This diversification can mitigate risk and provide steadier returns in case there's an issue at one mine in particular.
-
Low All-in Sustaining Costs ((AISC)): Focus on companies with AISC of $1,250 per ounce or lower. Lower costs can mean higher profitability, especially when gold prices are rising.
-
Long Mine Life: Seek miners with mines having an average life of 10 years or more. This ensures sustained production and potential for long-term gains.
-
Safe Political Jurisdictions: Give preference to miners in politically stable regions like Canada, Australia, the U.S., and certain areas in South America and Africa. Stability reduces operational risks.
-
Strong Balance Sheet: A solid balance sheet with low debt-to-earnings ratios is key. This financial health is especially important in a high-interest-rate environment, where refinancing debt becomes costlier.
-
Avoid Share Diluting Miners: Steer clear of companies with a history of diluting shares to fund operations, as they can erode shareholder value.
-
Dividends and Share Buybacks: Companies that pay dividends and engage in share buybacks can be attractive. These practices often indicate a commitment to returning value to shareholders and can lead to enhanced overall returns.
So, which miners fit that criteria?
As we approach the potential gold breakout in 2024, identifying the right mining stocks is crucial for maximizing returns. The key is to focus on miners with low all-in-sustaining costs, prolonged mine life, and operations in politically stable jurisdictions.
In my investing group, I meticulously assess these factors, and our recommendations are reflected in the stocks we classify as BUY or STRONG BUY.
Our portfolio comprises a selection of standout mining companies that we believe are well-positioned for growth. I've carefully analyzed these stocks, evaluating their performance, growth potential, and stability, to ensure they meet our stringent investment criteria.
For investors inclined towards higher risk for the chance of greater returns, we also delve into the realm of gold and silver mining developers and explorers. Our analysis has identified a few such companies trading at what I believe are deeply discounted valuations.
Gold in 2024: The Bottom Line
For investors aiming to capitalize on the rising gold prices in 2024, a mix of established miners with strong fundamentals and high-upside developers or explorers can offer a balanced yet opportunistic approach.
While the likes of Agnico Eagle Mines ( AEM , AEM:CA ) and Barrick Gold ( GOLD , ABX:CA ) provide stability and reliable returns, smaller explorers and developers present an opportunity for substantial growth, albeit with higher risks.
As always, diversification is a smart strategy for navigating this promising yet volatile market.
For further details see:
PHYS: Why Gold Prices May Exceed $2,500 In 2024