Q1 2024 Gold Outlook 2024

What factors have been driving gold prices in recent years?

The cost of living increased sharply across the world in the past few years, leading to sharp tightening of interest rates. Fiat currencies lost significant chunks of their values between 2021 and 2023. Yet, gold was initially unable to rise, following its sharp gains in the previous few years. It was held back by rising bond yields as a result of high interest rates. Yields on 10-year bonds rose from around zero to around 5%, increasing the opportunity cost of holding zero- yielding assets like gold and silver. This offset the impact of stronger physical gold demand for inflation hedging purposes through much of 2021 and 2022. But things started to change.

The global disinflation process slowly started from around the middle of 2022, which always meant that central banks would ease off the gas in terms of rate hikes. It wasn’t until around the middle of 2023 when many central banks, including the Fed, reached peak interest rates. Still, rates were seen remaining elevated for a long time, which was among the reasons why gold couldn’t break away cleanly in May, when it briefly peaked above the previous record that was set in 2020. That led to a sharp drop from around $2081 to the low of $1810 in October.

However, around the start of Q4, it started to become more apparent that the peak for inflation and interest rates had passed. Central banks’ tone started to change accordingly, from being uber hawkish to a little less hawkish, and eventually a bit dovish towards the end of the year. Inflationary pressures continued to wane across the world. Investors started to price in rate cuts in as early as the end of the first quarter of 2024. This gave gold another boost, as it rose about 18% from its October low to the current record high of $2146 set in early December, before easing back down a little.

In other words, gold was supported in 2023 by both inflation hedging purposes and expectations of interest rate cuts, among other factors. These factors will continue to influence gold in early parts of 2024.

We therefore foresee a strong year for the metal in 2024. Let’s discuss reasons why we think that is going to be the case, and what are the major caveats in our bullish gold 2024 forecast.

Gold outlook 2024: Central bank rate cuts or expectations thereof

As we head to a new year, inflationary pressures are likely to ease further across the world, leading to the start of the great rate-cutting cycle. The likes of the ECB, BoE and Fed are all expected to start the process from as early as the end of Q1, although more likely a little later in the year given the not-so-dovish rate holds by the former two central banks in December. The Fed has projected three rate cuts in 2024. The actual timing and extent of the rate cuts will depend on incoming data. But as we saw how much of a lift the price of gold obtained from expectations of rate cuts in 2023, we could well see significant gains in 2024 when central banks actually start loosening their polices and yields move further lower. There’s undoubtedly a lot of pent-up demand for gold given how hot inflation has been in recent years. Fiat currencies have lost significant chunks of their values. Gold, which some see as a true store of value, should find support on any substantial short-term weakness. The bulk of the buying could happen even before rates are actually trimmed, as markets tend to price future developments ahead of time. I think that the start of the year could be a positive period, especially given the bullish momentum from late 2023.

See our Central Bank Outlook 2024 section for greater detail in terms of where interest rates are headed and everything you need to know.

Impact of the dollar on gold

Gold is priced in US dollars, which means the metal tends to have an inverse relationship with the greenback. This is highlighted in the chart below, showing yearly candles for both gold and the Dollar Index.

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What’s interesting from the chart is that, in more recent years, gold has not fallen much whenever the Dollar Index has had a positive year. The bodies of the yearly candles for gold in 2021 and 2022 were much smaller relative to those of the DXY. In 2023, the DXY was down, yet gold was disproportionately higher. If the recent trend continues, gold may only pull back modestly should the dollar end higher in 2024. This also implies that if 2024 turns out to be a bearish year for the dollar, gold could shine even brightly.

See the FX section where our FX specialist has discussed the dollar’s 2024 outlook in greater detail.

What about gold’s physical demand?

One key driver of gold in recent years has been above-trend purchases by central banks. This partly explains why the impact of the dollar has been less on gold in the last few years compared to the past, as discussed above. According to the World Gold Council, the excess central bank demand in 2023 added 10% or more to gold’s performance. The organisation expects central bank gold buying will continue to defy expectations in 2024, even if it does not reach the same highs as the previous two years. More than 450–500 tons of gold could be purchased, to provide the precious metal an extra boost, it adds.

On top of central banks, China’s demand for gold should improve with an improving economy, although growth is expected to remain subdued. The world’s second largest economy has had a tough year. But the good news is that it can only recovery from here. China is the world’s largest consumer of gold among many other commodities, followed by India and the US. Gold purchases in China tend to rise ahead of the lunar new year, which will fall on February 10. The month before the Chinese New Year, i.e., January, is one of the busiest periods for buying gold. It has been a long-standing tradition in China for people to buy gold items such as jewellery and gold bars to give as presents to friends and families. But we could see increased gold purchases later in the year, too, when Chinese and global economic conditions will have hopefully improved.

What are the key risks to our bullish gold outlook?

One of the key risks to our view that gold will hit new highs in 2024 has to do with the dollar. At the time of writing in mid-December, the greenback was trading a touch lower against a basket for foreign currencies following two years of gains. In 2024, while the Fed’ expected rate cuts could weigh on the greenback against some currencies, it may still perform better against others. This is because other central banks who have been tightening their belts over the past couple of years, will also be looking to ease their policies, most notably the ECB and BoE. Should these central banks cut first or at a faster pace than the Fed, the likes of the EUR/USD and GBP/USD could drop back following their stronger performance in Q4. However, judging by the last policy decisions of 2023, both the BoE and ECB hinted at the prospects of keeping rates high for longer, with inflation in the UK in particular remaining worryingly high.

However, the negative impact of a potentially stronger Dollar Index on gold might well be offset by falling bond yields as a result of these potential rate cuts. Thus, the bigger threat to our gold forecast arises from a situation where the dollar performs stronger because of the lack of a significant reduction in the Fed interest rates, owing to a strong economy. In this situation, bond yields might not fall back as much, thereby underpinning the appeal of fixed income and undermining the upside potential of zero-yielding assets like gold.

Gold outlook 2024: Key levels to watch

_{Source: TradingView.com}

The 2-year consolidative price action between 2021 and 2022 allowed gold’s long-term charts to work off their overbought conditions, which then encouraged the bulls to push the metal to two new record highs in 2023. Those breakouts were only for brief moments, however. The lack of a more significant follow-through suggests supply is strong, with larger institutional players happy to offer into retail-driven bids. Still, the multi-year bullish trend suggests gold is a market for dip-buyers. So, we will be looking for bullish ideas on any notable dips.

The next key support below $2000 is at around $1950, roughly corresponding with the rising 200-day average (not shown) and prior support. Below this area, $1900 is the next potential support area, followed by the 200-week average and the point of origin of October’s breakout around $1830-$1840. Meanwhile, the slopes of both the 50- and 200-week MAs are pointing higher, objectively telling us that the long-term trend is indeed bullish.

In terms of key resistance levels to watch, the post-covid high of $2075 that was hit in August 2020 is going to remain a pivotal zone for gold, as it has not been able to post a daily close above this level since. If and when it does, then the December 2023 high of $2146 will come into focus next. Beyond this record level, we will have to rely on tools such as Fibonacci extension levels to determine levels where profit-taking is likely to occur. With that in mind, the 127.2% extension level of the entire retracement from August 2020 high to the low point of September 2022, comes in at $2200. The 161.8% extension level is at just of $2360.

Therefore, my objective 2024 gold targets are at $2200 and $2360. Will it get to these targets? We will have to wait and see.

Written by Fawad Razaqzada, Market Analyst.

Follow Fawad on X: @Trader_F_R