Proactive Investors - You don’t have to go back that many years to remember widespread scoffing at the prospect of US$2,000 gold.
But it’s here now, and it won’t go away.
The reasons are straightforward enough: the US is throwing its weight around as the dollar hegemon, devaluing its own currency to beggar its international rivals, and daring anyone to stop it. So far, no-one has.
But the real value of the dollar has fallen all the same, and that has to be reflected somehow. The read-across is most obvious in gold and bitcoin, with the wider equities and property markets showing more nebulous and disparate gains.
With all that in mind, what does 2024 have in store for the gold price?
The answer is: more of the same.
We can scoff, for now, at thoughts of US$2,500 or even US$3,000 gold.
But there is an election coming up in November, 'lawfare' is trying to remove a popular candidate from the ballot, and doubts about US election integrity are rife, both on left and right. A new film with the ominous title 'Civil War' is due to be premiered in April and, although it's supposed to be sci-fi, some people are treating it as prophetic. If they are right, gold would blast through US$2,500 with ease.
But let’s say the US does run a reasonably sane and sensible election later in 2024, and that economic stability returns to the degree that it can do in the post-QE world.
A more measured environment like that might potentially make for less significant spikes in the gold price, as safe-haven buying abates and prospects of apocalypse diminish.
But even in that context, there’s still the wider economic environment to consider. President Biden’s Inflation Reduction Act followed more than a decade of generalised money printing.
Is there a limit to how much money can be printed? The answer to that, in pracise, is: perhaps not. But either way, cause and effect still apply. The effect has been twofold: inflation, and rising interest rates to tackle it.
Traditionally, the gold price has suffered in higher interest rate environments, because when the yield on cash or bonds becomes attractive, the benefits of holding yieldless gold go down. Sure, gold is a store of value in hard times. But it doesn’t earn you anything.
Note, though, that this time round, gold’s usual relationship to yield hasn’t held good at all. On the contrary, we’ve seen record gold prices at the same time as we’ve seen rates rise to their highest levels in years.
The US Federal Reserve will now embark on a concerted effort to keep inflation low, and to get rates back down. In a traditional economic view, that ought to be good for gold anyway, since yields will fall. On the other hand, it’s becoming an open question how much relevance any sort of traditional view still has.
Confidence in the financial system is arguably at its lowest since Nixon abandoned the gold standard in 1971, and in fact the whole economic environment right now resembles the early 1970s, with high oil, high gold, high inflation, war in the Middle East and political scandals by the dozen.
What’s more, as the reliability of old, legacy media channels continues to be undermined, it’s becoming harder and harder to source accurate information.
We seem to have a new paradigm emerging.
In times of uncertainty, buy gold.
In times of falling rates, buy gold.
In times of rising rates, buy gold.
When shouldn’t you buy gold?
Actually, the answer to that is no longer clear cut. One suggestion might be: once a rival currency to the dollar is established, either separately or in concert by one or more of the BRICs nations. That no longer seems an outlandish possibility, but it’s still years away.
And, for all of its chaos, there’s still so much that America does right. If you were forced to hold an actual fiat currency, wouldn’t it still be US dollars? A basket, perhaps, but not without a significant USD component.
That speaks for itself, at least for now.
But given the choice of adding gold to a portfolio that already held US dollars, there could be no hesitation.
Still, expect significant gyration in gold in 2024, especially as the 'lawfare' around the election intensifies, and as foreign policy questions continue to generate uncertainty.