The Outperformance of Gold
In 2024, gold has repeatedly reached new record highs. This was evident in the first trading days of January this year, and most recently (as of May 13th, at the time of writing this article) on April 7th when the price reached $2431.53 US dollars. Let's delve into the factors influencing gold price creation, starting with an examination of Federal Reserve interest rates.
Source: [Yahoo Finance](https://finance.yahoo.com/quote/GC=F/)
Influence of Monetary Policy
While several factors contribute to gold price creation, perhaps the most significant are the interest rates set by the Federal Reserve (Fed). There is little doubt about the inverse relationship between gold prices and US monetary policy. Historical data suggests that when the Fed lowers interest rates, the price of gold tends to increase, and vice versa. Furthermore, even market expectations of the Fed changing its monetary policy can have this effect.
Other Factors
Among the other components influencing gold prices are supply and demand dynamics, central bank operations, the current macroeconomic climate, and geopolitical risks.
Supply and Demand: Increasing the supply of gold is nowadays a rare occurrence. For example, opening a new gold mine would have a decreasing effect on gold prices, while a decrease in supply would lead to higher prices.
Central Bank Operations: The year 2022 witnessed record central bank operations focused on buying gold. This trend continues in 2024, with countries such as China, Turkey, the Czech Republic, Poland, and Qatar among those with the highest demand. The outlook remains positive for high gold prices, indicating that a drop in gold prices due to this reason is not expected.
Macroeconomic Climate: Gold tends to be bought in higher volumes during uncertain economic climates. While this is not universally agreed upon among economists and analysts, it is generally observed that when other assets, such as stocks, perform poorly, gold prices are expected to rise. The current macroeconomic climate is characterized by a great deal of uncertainty, particularly due to the impact of long-term interest rates on US employment and GDP growth.
Geopolitical Risks: Geopolitical tensions, such as the war in Ukraine and tensions in the Middle East, also influence gold prices.
Two Scenarios for 2024
There are two scenarios for the remaining months of the year. The first scenario suggests gold stagnation, supported by the argument that the uncertainty in the US economy is not high enough to warrant further increases in gold prices. However, the second scenario anticipates further increases in gold prices due to geopolitical tensions, high gold demand, and inflationary pressures pushing prices upwards.
Sources:
https://www.bullionbypost.co.uk/info/gold-price-forecast-2024/
https://www.cbsnews.com/news/gold-price-forecast-for-spring-2024-heres-what-experts-predict/
