The Israel-Hamas war in Gaza and attacks on the Red Sea shipping route are adding to near-term inflationary risks that could push gold prices even higher in 2024.
Gold prices surged in December 2023 on expectations of US rate cuts as early as March, as the metal is used as a hedge against inflation.
The London Bullion Market Association (LBMA) gold price rose 14.6% in 2023 to reach $2,078/ounce on Dec. 28, 2023, the highest annual close on record, the World Gold Council said in a Jan. 11 report.
"Elevated geopolitical risks in the Middle East [will] continue to add to near-term inflationary risks" in 2024," the council said.
Conflict in the region has pushed the Global Geopolitical Risk Index compiled by US Federal Reserve economists to its highest level since March 2022, Kelvin Wong, senior market analyst for OANDA, said in a Jan. 15 note.
Strong 2023 performance
Gold was one of the best-performing assets in 2023, buoyed by strong central bank demand, robust retail demand in key markets and increased geopolitical risk, Juan Carlos Artigas, World Gold Council global head of research, said in a separate Jan. 4 note.
"Gold correlates more to 2-year Treasury yield than the historically more important 10-year yield during heightened policy uncertainty," the council said in the Jan. 11 report on gold being the "surprising star" of 2023 that surged "against the odds of rapidly rising interest rates and resilient economies."
"Central banks are largely to thank for the outperformance, but elevated geopolitical risks likely created investor reticence to give up gold, as well as being a key driver of central bank demand," the Jan. 11 report said.
Central banks contributed up to 15% of gold's annual performance, the council said.
"Self-correcting gold prices" also helped reduce relative volatility, while bond yields were "only a small drag, and ended the year roughly where they started," the World Gold Council said.
January price signals
Gold prices jumped Jan. 12 after US Consumer Price Index data showed inflation rising faster than expected in December 2023, according to a Jan. 12 note from SP Angel.
"US Treasuries initially sold off on the [CPI] release, with the 10-year climbing to 4.065%. However, buyers have subsequently pushed yields down to 3.97%, supporting gold. The market currently expects a 68% chance of a 25 [basis point] rate cut in March," SP Angel said.
Forex.com market analyst Matt Simpson sees gold markets "pricing in aggressive Fed rates cuts" but cautioned that the cuts "could be scaled back if data remains firm (and send gold lower)," he said in a Jan. 10 note.
Adding to the bullish case for gold, Citi Research has put a US recession in its "base case" forecast for 2024.
"While the classical trades for this case may well be to position for wider credit spreads, lower equities, and lower rates, these trades may not be that timely, as the market is trading very much the soft landing theme and at this stage it is not clear, whether this will change drastically" in the first quarter of 2024, Citi Research said in a Jan. 10 note.
"We therefore prefer for now a long gold trade, that should also do well in a recession, and we would add more aggressive recession trades in other asset classes as the deceleration becomes clearer."
