HomeMarket NewsMiningCentral Banks and Geopolitics Unite to Fortify Gold Market in 2024

Central Banks and Geopolitics Unite to Fortify Gold Market in 2024

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Are central banks steering the US economy to safe landing with interest rates above 5%? The answer is uncertain, but the possibility of a looming global recession remains on the horizon. This impending unpredictability should motivate many investors to include safe-haven assets like gold in their portfolios, as indicated in the latest World Gold Council (WGC) report.

The WGC’s report outlines three potential scenarios that the global economy may confront, all of which could significantly influence the trajectory of gold in 2024. Let’s delve into each of these scenarios below.

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Credit: World Gold Council

The first scenario revolves around the market’s anticipation of a “soft landing” orchestrated by the Federal Reserve, a prospect that would be warmly embraced by many investors. Yet, achieving this calls for impeccable precision from policymakers and relies on numerous factors beyond their immediate control.

History reveals that a soft landing is a rare accomplishment. Out of nine tightening cycles in the past five decades, the US central bank has managed a soft landing merely twice, while the other seven culminated in a recession, leading to a “hard landing”, which constitutes the second scenario in question.

The employment landscape stands as a crucial determinant in the potential shift from a soft to a hard landing. Although unemployment in the US currently remains low, the elements that sustained its resilience in 2023, such as a scarcity of labor supply and robust corporate balance sheets supported by a healthy consumer spending, have started to wane – historically, these factors have had a propensity to change rapidly.

The third, less probable scenario entails a “no landing” outcome characterized by a resurgence in inflation and growth, propelled by a rebound in US manufacturing and an upturn in real wages. However, the WGC views this more as an interim state rather than a definitive outcome, citing Morgan Stanley’s depiction that “a no landing is just a soft or hard landing waiting to happen.”

From a historical vantage point, the first and third scenarios could potentially lead to little to no growth in average gold performance next year, according to the WGC. And yet, two additional factors currently favor gold: geopolitical risks and central bank demand.

Moreover, the likelihood of a recession is not insignificant. In terms of risk management, this scenario strengthens the argument for maintaining a strategic allocation to gold within investment portfolios, as concluded in the report.

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