Gold Outlook 2024

Composite PMIs remain in expansion, and manufacturing PMIs are higher than they were mid-2023.³ Real earnings have been rising for the last six months,⁴ resulting in healthy balance sheets. Household excess savings are not yet depleted,⁵ and unemployment remains historically low. Fiscal stimulus plans for 2024, should they materialise, will also offer support.

Although these factors will not prevent a slowdown in growth, when combined with adequate monetary policy they could help to avert a contraction in the economy.

A recession is not off the table yet

While the market odds favour the Fed pulling off a soft landing, this would be no mean feat. Historically, the Fed has managed a soft landing only twice following nine tightening cycles over the past five decades. The other seven ended in a recession (Chart 2). This is not all that surprising: when interest rates stay higher for longer, pressure on financial markets and the real economy generally builds.

A key determinant of whether economic conditions will shift from a soft to a hard landing is the labour market. While unemployment in the US remains low, some of the factors that kept it resilient in 2023 – such as a dearth of labour supply and solid corporate balance sheets aided by a healthy consumer wallet – have not only faded but have a historical tendency to turn quite quickly.

To put things into context, previous recessions in the US started on average between five and 13 months after growth in payrolls reached the same level as today.⁶ In addition, the so-called Sahm rule, an unemployment indicator developed at the St Louis Fed, is hinting that we are mere months away from a recession.⁷

Various commonly followed indicators still point to a moderate to significant chance of a recession (Chart 3). On average, these indicators suggest a recession probability of 45% over the next 12 months. 

A (less likely) third option

A soft landing or a recession are not the only outcomes investors could face next year. A 'no landing' is also on the cards.⁸ This scenario is characterised by a reacceleration of inflation and growth. The rebound in US manufacturing and recovery in real wages are two potential drivers of such a scenario.⁹

Arguments for this outcome focus on the fact that the US economy has become less capital intensive and thus less interest rate sensitive than in the past. To boot, households have benefited from sizable pandemic refinancing at low rates (Chart 4). ¹⁰ And US corporates have somewhat inoculated themselves against the tide of higher rates with a doubling of their duration over the last 30 years.¹¹

Add the prospect of strikes,¹² the fact that budget cuts are unlikely in an election year, and spikes in energy prices from a possible continuation of the Israel-Hamas conflict, and the concept of inflation resurgence becomes a real threat.

We nonetheless believe a no-landing scenario is an unlikely path: less of an outcome but rather more of an interim state. As Morgan Stanley put it: “A no landing is just a soft or a hard landing waiting to happen”.¹³ And should the Fed be compelled to hike further, putting more pressure on households and corporations, this would increase the likelihood of a deeper recession down the line, as it did in the late 1960s (Chart 5).

Can gold break away?

Gold’s performance responds to the interaction of its roles as a consumer good and as an investment asset. It draws not only from investment flows but also from fabrication and central bank demand.¹⁴

In this context, we focus on four key drivers to understand its behaviour:¹⁵ 

• Economic expansion: positive for consumption
• Risk and uncertainty: positive for investment
• Opportunity cost: negative for investment
• Momentum: contingent on price and positioning

In practice, these factors are captured by economic variables such as GDP, inflation, interest rates, the US dollar, event risk, and the behaviour of competing financial assets which, in turn, determine a macroeconomic environment (Table 2). 

Sidewinding in a soft landing

A soft-landing scenario could benefit bonds and risky assets. Consensus earnings expectations appear optimistic¹⁶ and high interest rates would keep bonds attractive. This is consistent with historical evidence, with both bonds and stocks performing well in the two previous soft landings. Gold, however, has not fared as well – increasing slightly in one and decreasing in the other (Chart 6).

This is likely the result of two competing forces:

• lower nominal rates
• lower inflation

Lower nominal interest rates should bring a respite for gold: 75–100bps of policy rate cuts are likely to translate into no more than about c.40–50bps of longer maturity yield drops. We estimate this response given the bull steepening that has occurred during past soft landings and we also factor in continued term premium pressure, quantitative tightening and high issuance supply in 2024. That drop in longer maturity yields, all else being equal, suggests a gain of about 4% for gold. 

Alas, all else is likely not equal. If inflation cools more quickly than rates – as it is largely expected to do – real interest rates will stay elevated. In addition, subpar growth could constrain gold consumer demand. In summary, expected policy rate easing may be less sanguine for gold than it appears on the surface.

Table 2: Gold’s performance in a given economic scenario is driven by the interaction of its four key drivers 

Economic scenarios and factors that impact on gold based on key drivers*

Consistent recessionary outperformer

If a recession becomes a reality, weaker growth will help push inflation back towards central bank targets. Interest rates would eventually be cut in response. Such an environment has historically created a positive environment for high-quality government bonds and gold (Chart 7).

Higher rates may spook 

If the no-landing scenario does occur, it could prove initially challenging for gold. While positive economic growth would support consumer demand and higher inflation would increase the need for hedges, it is likely that the combination of higher rates and a stronger US dollar would create a drag, as they did in September 2023. But if inflation surged again it could elicit an even stronger monetary response – leading us back to the spectre of a hard(er) landing further down the line and a strong case for strategic gold allocations.

History may not have the last word

From a historical perspective, a soft-landing or a no-landing scenario could result in a flat to slightly weaker average gold performance next year. However, this time around there are two additional factors in gold’s favour: 

• Geopolitical risks abound. In 2023 there were two significant event risks – the SVB failure and the Israel-Hamas conflict. Geopolitics added between 3% and 6% to gold’s performance. And in a year with major elections taking place globally, including in the US, the EU, India, and Taiwan,¹⁷ investors’ need for portfolio hedges will likely be higher than normal. 
• Central bank demand. Purchases by official institutions have helped gold defy expectations over the past two years. In 2023 we estimate that excess central bank demand added 10% or more to gold’s performance. And they will likely continue buying.¹⁸ Even if 2024 does not reach the same highs as the previous two years, we anticipate that any above-trend buying (i.e. more than 450–500t) should provide an extra boost.¹⁹

Furthermore, the probability of a recession is not insignificant. From a risk-management perspective, this would provide strong support to the case of maintaining a strategic allocation to gold in the portfolio.