TWELVE months ago, a recession seemed imminent for the United States. However, the economy fell short of this expectation. The significantly reduced risk of a US recession has diminished one of the primary factors contributing to gold’s value. Despite this, gold has been remarkably resilient, against numerous challenges: the global economic slowdown, rising cost of capital and geo-political tensions. It unapologetically continues to prove its appeal as a safe haven.

Inflation has receded, however; we believe it would be premature to claim victory. To prevent a resurgence of inflation, central banks may need to continue restraining economic activity by maintaining higher terminal rates. Consequently, economic strains will likely intensify in the coming months owing to the higher cost of capital. The most plausible outcome will be a mild US recession in the first half of 2024. This could trigger the Federal Reserve to initiate a series of modest rate cuts reactively only in the second half of 2024. Even if the Fed policymakers somehow successfully achieves a “soft landing”, the real GDP growth in 2024 will likely be subpar, at best. In all possible scenarios, the global economy will face a period of uncertainty in 2024, which will navigate fund flow towards precious metals.

We might just be entering a world where dollar strength is persistent, and unlikely to diminish quickly. The US dollar is expected to remain robust against most foreign currencies in the first half of 2024 but will eventually wane if the Fed starts easing interest rates.

Gold prices remained resilient last year, considering both the interest rate environment and the stronger US dollar. As long as consumer spending patterns are strong and moderate rate cuts are anticipated, gold’s flight is set to take off in 2024. The market saw significant fluctuations and outflows in 2023, when higher real yields made gold less attractive to the investment community. However, this weak investment demand was offset by substantial purchases from central banks.

Technically, gold completed a “reverse head and shoulder” pattern when it breached US$2,100 per ounce in early December. The 300-point rally (indicated by the green arrow) from the low-US$1,800s in September to US$2100 per ounce opened doors to another 300-point swing on the upside. Provided gold continues to hold above the immediate support zone of US$1,980 to US$2,000 per ounce, gold bulls will be eyeing a target of US$2,400 per ounce. Investors are recommended to adopt a “buy on dips” strategy within these “support zones”.

The markets are backing the notion of a “softish landing” and are factoring in the Fed’s potential rate cuts of 150 basis points between the second quarter and the end of 2024. Lower interest rates and expectations for a weaker USD, are likely to revitalise investment demand. This will hold true, especially as central banks’ buying is expected to remain robust in 2024. Central banks bought around 10.2 million ounces of gold in 2022 and were projected to purchase around 13 million ounces in 2023.

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Throughout 2023, gold’s status as a safe haven was also bolstered by the escalating geo-political risks. The three ongoing conflicts - Russia-Ukraine, Israel-Hamas, and China-Taiwan - will continue to be the focal point in 2024. Amid an election-heavy year, where top economies will experience power struggles, any further escalation in these conflicts could serve as an additional catalyst for gold in 2024.

Choppy moves in gold could emerge from dollar index futures which recently dipped to a five-month low ahead of the long holiday season, with cooler-than-expected US inflation data supporting the Fed’s pivot early this year. The decline in US annual inflation is the most important indicator that the tight monetary policy is starting to bear fruit.

As the final week of 2023 unfolded, gold maintained a positive outlook, holding above its resistance zone of US$2,030 to US$2,050 per ounce. As it ended 2023 above the US$2,070 mark, it may gain further momentum in the first week of January 2024.

The writer is senior market analyst at Phillip Nova