Bank of America looks ahead to 2024 and believes that gold prices may reach a high of $2400, an 18% surge from current levels, but an important trigger is for the Federal Reserve to cut interest rates early. Hedge fund leader Paul Tudor Jones stated that the world is currently dealing with the most threatening and challenging geopolitical environment, and believes that gold should be added to investment portfolios.
At the beginning of this week, gold prices surged to a new peak of $2176, and the end of the ceasefire between Hamas and Israel prompted investors to flock to buying this safe haven asset. After falling to $1820 per ounce on October 5th, a series of factors have jointly created a favorable environment for the recovery of gold.
The geopolitical tensions caused by the Middle East conflict, coupled with the continuous decline in US inflation, have driven up the price of gold significantly.
Expectations have played a crucial role in triggering an increase in gold prices, as gold prices are influenced by market expectations for future Federal Reserve policies.
With the sustained significant slowdown in US inflation and the recent decision of the Federal Reserve not to raise interest rates, market participants are increasingly inclined towards the expectation that the Federal Reserve will implement earlier and more significant interest rate cuts in 2024.
By the end of November 2023, the market implied probability of future federal funds rates, measured by CME's Fed Watch tool, suggests that the likelihood of a rate cut as early as May 2024 is close to 75%. Investors expect four interest rate cuts by December 2024, with a probability of 77%.
As interest rates decline for various reasons, the attractiveness of gold becomes stronger. Firstly, the yield of short-term government bonds, which compete with gold as a safe asset, often decreases. Lower expected cash returns encourage investors to seek better alternative solutions. In addition, when interest rates decrease due to economic slowdown or recession, stocks may find it difficult to provide positive returns.
Gold can ultimately serve as a tool to hedge economic risks and fears, providing investors with unique diversification qualities in their investment portfolios, as it is not related to bonds and stocks.
As the November 2024 US presidential election approaches and there may be fierce competition between current President Biden and Republican challengers, the existence of political uncertainty may further support the price of gold.
A recent study conducted by WisdomTree shows that gold often performs well during periods of economic stress. When economic activity sharply declines, gold often performs positively, while stocks often perform poorly. Gold also outperformed US treasury bond bonds, which are seen as competitive defensive assets.
There has been a significant increase in investment interest in gold, with approximately $1.5 billion in net funds flowing into the world's largest gold ETF, SPDR Gold Trust (GLD), in November, according to data from Vettafi ETFdb.com. This capital inflow is not only the largest since March 2022, but also breaks the five consecutive months of capital outflows, marking a resurgence of investor interest in this precious metal.
"We believe that gold may perform stronger in the coming months," said John Hathaway, Senior Portfolio Manager at Sprott Asset Management USA, Inc
He expressed concern about the Federal Reserve's commitment to a "long-term high" interest rate stance, suggesting that it may trigger broader credit deflation and recession. In addition, lingering issues in the banking industry and labor market may further support the trend of gold prices.
Jones stated on Square Box of CNBC in the United States that the market is currently facing the most threatening and challenging geopolitical environment, and the United States is working hard to address the "weakest fiscal situation since World War II.".
He suggested that gold investment should explode, possibly occupying a larger proportion of your investment portfolio than in the past.
If the Federal Reserve does choose to cut interest rates early, Bank of America predicts that gold prices may reach $2400 per ounce next year, an 18% surge from current levels.
This prediction emphasizes a convincing emerging prospect for gold as an investor in 2024.
