There seem to be several events packed into the coming 12 months that could make gold very interesting for investors. An unusually high number or risk events are occurring in a situation in which global interest rates are expected to decline. The dollar in particular is facing a challenging environment. This could be another unique opportunity for gold bulls, perhaps a repeat of 2018?
We’ve already discussed two of the major factors that could play into gold rising this year: Elections and interest rates. But how they could affect gold specifically is important to consider as well. Then we can address some additional factors, such as geopolitical risk and the lack of investment in the sector.
Elections often cause increased risk for markets, particularly if the candidates vying for office have different views on fiscal and monetary policy. That’s the case in the US, the UK, Taiwan, Mexico, and a few others. Investors from those countries or businesses who would invest in those economies are more likely to hold on to safe haven assets to see how the elections turn out.
Generally, risk on means that interest rates go up along with the price of gold. But global central banks are now looking to at least hold if not cut rates this year, as they complete their fight against inflation. Lower interest rates makes gold and its ability to preserve value more attractive as an investment, which means its price tends to rise.
Among the major central banks, the Fed has the most room to cut if the economic situation merits it. That means the dollar has a larger potential for weakness compared to its major peers, and that in turn could help support the relative price of gold. In the meantime, de-dollarization efforts continue, with the central bank of China still buying lots of gold.
The high interest rate environment has had an ancillary effect on gold as well. By increasing borrowing costs, companies such as gold miners, have postponed capital investment programs. Big miners have found it cheaper to buy up rivals than to spend on gold exploration and resource development. That means over the course of the next several months and even years, less gold production will come online. With less supply, the price would naturally increase.
On top of the elections and weaker dollar is the potential for more geopolitical risk events that could give gold a boost as well. Tensions in the middle east might be heightened as Iran has elections this year, and might want to throw its weight around to shore up domestic support. Recently, it moved a warship into the southern Red Sea, where its proxy the Houthis are attacking transiting ships. China has been more outspoken about reunification of Taiwan, also as the latter heads to the polls next week.
Of course there is always the possibility of a Black Swan event that could send things in a completely different direction. The global economic recovery might be stronger than anticipated, allowing for central banks to keep rates higher for longer, for example. For the moment, however, there seem to be an unusual number of factors lining up that could keep the price of gold buoyant this year.
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- Source: https://www.orbex.com/blog/en/2024/01/is-2024-the-year-for-gold
