KUALA LUMPUR, MALAYSIA – Media OutReach Newswire – February 29, 2024 – Gold is trading above $2,000 an ounce in early 2024. Analysts expect that even later in the year, gold prices could remain above $2,000 per ounce, reaching new all-time highs. Factors contributing to this include geopolitical uncertainty, the likely weakening of the US dollar and potential interest rate declines. But before we rely on these factors in the future, we need to understand how they influenced the past.
A new scenario of gold price dynamics
For 90 years, the value of gold has mainly depended on the volume of transactions between Western and Eastern markets. Western countries determined supply and demand, while Eastern countries acted as counterparties to the transaction. So when the volumes of physical gold purchased by Britain or Switzerland increased, its price increased, and vice versa. As a result, gold moved from west to east and back in sync with the fall or rise in price.
The second factor that has historically influenced the price is the relationship between the price of gold and the real yield of US government bonds. When the real yield fell, bonds lost their appeal and investors turned to gold. Once the trend reversed and real yields began to rise, investors returned to bonds.
However, since the end of 2022, both schemes have failed. The yield on US ten-year bonds rose to 4.33%, above 2022 highs, breaking a 15-year high. Despite expectations, this did not lower the price of gold, which instead increased by 16% between November 2022 and August 2023, from $1,643 to $1,954 per ounce.
The correlation between gold trading volumes and the gold price has also stopped working. Since the third quarter of 2022, the United Kingdom and Switzerland have been net gold exporters, 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 the case. Thus, the West has not significantly influenced the prices of precious metals.
What will affect gold in 2024?
The escalation of geopolitical conflicts is driving up the value of gold.
Due to the geopolitical events of 2022, dollar assets have become riskier for many countries. The central banks of the countries of the South, Eastern Europe and the Middle East have actively pursued a policy since the end of 2022 aimed at constituting the gold part of foreign exchange reserves. According to a report from the World Gold Council (WGC), central banks bought 800 tonnes of gold in the first nine months of 2023, up 14% year-on-year. Excessive demand from central banks has caused the value of gold to rise by 10% in 2023.
“It is central bank gold purchases that will be the main driver of growth in 2024,” said Octa financial markets analyst Kar Yong Ang. “If the trend continues and the level of gold reserves moves towards an average of 40% of the gold composition of reserves, this would mean an additional $3.2 trillion in assets, an increase of 25% in 2025, which would correspond to a price of $2,500 per ounce,” he added.
Gold has also experienced a further rise since the start of the Palestinian-Israeli conflict: since October 2023, it has gained more than 8%. We can therefore conclude that any worsening of the geopolitical situation will have a positive impact on gold.
Stabilization of inflation will continue to support gold prices. In 2022, global inflation has reached its highest levels in decades. However, it is also true that inflation passed its peak at the end of 2023. Most analysts believe that inflationary pressures will continue to ease in 2024.
“Traditionally, the price of gold is 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-earning assets such as gold is increasing,” said Kar Yong Ang.
Dedollarization of developing economies.
Investors view gold as an alternative way to build savings and protect against inflation and currency risk. Demand for gold is increasing because Brazil, Russia, India and China (members of BRICKS) are looking for ways to improve their monetary independence.
The main factors affecting the price of gold are inflation, increasing demand from central banks, dedollarization of developing economies, microeconomic situation and geopolitics. The combination of these factors will create conditions for growth in the price of gold 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 of gold is expected to continue and gold may see a price of $2,300 per ounce, so the average price in 2024 will be $2,170.
Hashtag: #Octa #gold
The issuer is solely responsible for the content of this announcement.
