Gold is trading above $2,000 per ounce in early 2024. Analysts
expect that even later in the year, gold prices may remain above $2,000 per
ounce, reaching new historical highs. Among the factors favouring this are
geopolitical uncertainty, the likely weakening of the U.S. dollar, and
potential interest rate cuts. But before relying on these factors in the
future, we must understand how they have influenced the past.
A new scenario of gold price
dynamics
For the past 90 years, the value of gold has depended primarily
on the volume of transactions between the Western and Eastern markets. Western
countries determined supply and demand, while Eastern countries acted as
counterparties to the transaction. Thus, when the volumes of physical gold
purchased by Great Britain or Switzerland increased, its price grew, and vice
versa. As a result, gold moved from the West to the East and back synchronously
with the price decreasing or increasing.
The second factor that has historically influenced the price is
the relationship between the price of gold and the real yield on U.S.
government bonds. When the real yield decreased, bonds lost their appeal, and
investors moved into gold. Once the trend reversed and real yields began to
rise, investors returned to bonds.
However, since the end of 2022, both patterns have failed. The
U.S. ten-year bond yield rose to 4.33%, above the 2022 highs, beating a 15-year
record. Despite expectations, this didn’t lower the price of gold, which
instead rose from November 2022 to August 2023 by 16%, from $1,643 to $1,954
per ounce.
The correlation between gold transaction volumes and the gold
price also stopped working. Since the third quarter of 2022, the UK and
Switzerland have been Netto-exporters of gold, i.e. sellers. According to the
historical paradigm, this should also have been a reason for the price of gold
to fall. However, as we can see, this is not happening. Thus, the West has not
significantly influenced the pricing of precious metals.
What affects gold in 2024?
Escalating geopolitical
conflicts are causing gold to rise in value. Due
to the geopolitical events of 2022, dollar assets have become riskier for many
countries. Central banks in the Global South, Eastern Europe, and the Middle
East have been actively pursuing a policy of building up the gold part of
foreign exchange reserves since the end of 2022. According to a World Gold
Council (WGC) report, central banks bought 800 tonnes of gold in the first nine
months of 2023, up 14% year-on-year. Excess demand from central banks has
boosted the value of gold by 10 per cent in 2023.
‘It is the central banks’ purchases of gold that will act as the
main driver of growth in 2024′, said Kar Yong Ang, the Octa financial market
analyst. ‘If the trend continues and the level of gold reserves moves towards
an average of 40% of the gold composition in reserves, that would mean an
additional $3.2 trillion in the asset—a 25% rise in 2025, which would
correspond to a price of $2,500 an ounce’, he added.
Gold has also seen another rise since the beginning of the
Palestinian-Israeli conflict: since October 2023, it has added more than 8%.
Hence, we can conclude that any aggravation in geopolitics will have a positive
impact on gold.
The stabilisation of
inflation will continue to support gold quotes. In
2022, global inflation reached its highest levels in decades. However, it is
also a fact that inflation passed its peak at the end of 2023. Most analysts
believe inflationary pressures will continue to ease in 2024.
‘Traditionally, the gold price has been negatively correlated
with the inflation rate. The lower the inflation rate, the lower the interest
rates on government bonds. As a result, the relative attractiveness of
non-interest-bearing assets such as gold increases’, said Kar Yong Ang.
Developing economies de-dollarisation. Investors see gold as an alternative means of building savings
and protection against inflation and currency risk. Demand for gold is
increasing because Brazil, Russia, India, and China (members of BRICKS) seek
ways to improve their currency independence.
The main factors affecting gold’s price are inflation, rising
demand from central banks, de-dollarisation of developing economies,
microeconomic situation, and geopolitics. The combination of these factors will
create conditions for the growth of gold price in 2024—in the first half of the
year, the cost of the precious metal may exceed $2,200 per troy ounce. In the
second half of the year, the upward trend in gold is likely to continue, and
gold may show a price of $2,300 per ounce, so the average price in 2024 will be
$2,170.
About
Octa
Octa
is an international broker that has been providing online trading services
worldwide since 2011. It offers commission-free access to financial markets and
various services already utilised by clients from 180 countries with more than
42 million trading accounts. Free educational webinars, articles, and
analytical tools they provide help clients reach their investment goals.
The company is involved in a
comprehensive network of charitable and humanitarian initiatives, including the
improvement of educational infrastructure and short-notice relief projects
supporting local communities.
Octa has also won more than 70 awards
since its foundation, including the ‘Best Educational Broker 2023’ award from
Global Forex Awards and the ‘Best Global Broker Asia 2022’ award from
International Business Magazine.