Ole Hansen: Central banks will continue to buy a lot of gold next year

The ounce price of gold rose after 3 years due to dovish expectations regarding the US Federal Reserve (Fed), geopolitical risks, and the decline in the dollar index.

While expectations that central banks could begin dovish monetary policies in 2024 are increasing, the fact that the Fed in particular signaled that it could take action for interest rate cuts next year and the released data supporting hopes for a "soft landing" in the economy stood out in global markets.

Fed Chair Jerome Powell stated in his remarks at the Fed's latest interest rate decision meeting that they believe the policy rate is likely at or near its peak in the tightening cycle, and conveyed that while bank officials do not find further interest rate hikes appropriate, they also do not want to take this possibility off the table.

While the strengthening of dovish expectations supported the ounce price of gold, the decline in bond yields also continued to suppress the alternative cost of gold.

Although the US 10-year bond yield, which finished 2022 at the 3.88 percent level, saw levels above 5 percent, it retreated from these levels and finished 2023 at almost the same level, at 3.8810 percent.

On the other hand, concerns that the Israel-Palestine conflict could spread to a wider area increased demand for safe-haven assets.

The wedding season in India, the Christmas period in the Western world, and the arrival of the new year in China were also effective in the increase in demand.

The ounce price of gold, which saw a record level of 2,145.12 dollars during the year, increased by 13.11 percent this year to 2,062.74 dollars and achieved the highest annual close of all time. Thus, gold brought a smile to its investors' faces after 3 years.

Analysts said that the continuation of question marks regarding Taiwan on the Chinese side also highlights gold's safe-haven feature.

The fact that Asian central banks took measures to protect their currencies during the year was also among the factors supporting gold.

Concerns that the global economy would slow down in 2023 also supported gold. Global recession risks and concerns and uncertainties regarding the course of monetary policies also affected the ounce price of gold in an upward direction.

While news that the Central Bank of China continues to increase its gold reserves contributed to gold's high performance, investors turned to gold as a safe haven following the bankruptcies of SVB and Signature Bank.

Gold's ounce last rose in 2020

The ounce price of gold, which last finished 2020 with a 25.2 percent rise, had finished 2021 with a 3.8 percent decline and 2022 with a 0.3 percent decline.

In 2021 and 2022, the hawkish monetary policies of developed country central banks suppressed the ounce price of gold. Another factor that negatively affected gold in 2021 was the tendency of investors to move away from safe havens due to the reduced uncertainties following the re-nomination of Jerome Powell as Fed Chair.

Saxo Capital Head of Commodity Strategy Ole Hansen stated in his assessment to an AA reporter that gold and silver could benefit from low bond yields and low funding costs in 2024.

Predicting that the rises in the ounce of gold could continue next year under the influence of three factors, Hansen stated that these factors would be the acceleration in hedge funds' gold demand, central banks continuing to buy physical gold at a robust pace, and rising carrying costs.

Hansen emphasized that the expected number of interest rate cuts as the Fed turns toward rate cuts is proven by soft landing messages, but a hard landing or recession could trigger an even greater need for interest rate cuts.

Stating that despite the rise in bond yields, the record gold purchases by central banks in the last two years are the main reason why gold has managed to rise, Hansen assessed, "We predict that the ounce price of gold could reach a new record level of 2,300 dollars with the support of the renewed increase in gold ETF demand, the continued demand from central banks, and a potentially weakening dollar."

Commerzbank Commodity Analyst Barbara Lambrecht also said that gold was one of the best-performing commodity groups traded on stock exchanges this year.

Stating that the possibility of the Fed lowering interest rates has already caused gold prices to rise significantly, Lambrecht conveyed that upcoming interest rate cuts will be in favor of gold, and therefore the ounce of gold could rise to 2,150 dollars in the second half of 2024.

Expressing that investment demand is also likely to revive with the interest rate cuts that are visible on the horizon and expected to materialize, Lambrecht said, "However, high local gold prices may negatively affect gold demand in China and India, the two largest gold consumers in Asia. Because gold consumers in China, especially in India, are generally sensitive to prices."

Lambrecht stated, "Experience from recent years shows that central banks will continue to buy a lot of gold next year, even if it is difficult to reach the extraordinarily high volumes of this year and last year."

News Source: 12punto