Why 2024 could be a treasure trove for Gold

With the gold price near all-time highs in every major currency, investors are wondering what happens next.

From where we sit, the gold price is likely to stay rangebound between US$2,000 and US$1,900 until a clear catalyst emerges to drive it higher. But once gold cracks US$2,000, it could stay higher for longer. Below we explain why.

For now, gold has topped at US$2,000

Technical analysis – the practice of studying price charts, looking for trading signals and patterns – is a bit of a tea leaf reading exercise at the best of times.

Nevertheless, when one looks at the US dollar gold price a pretty clear pattern emerges. Every time it has tipped over US$2,000 an ounce, it has fallen. One doesn’t have to be a tea leaf reader to see a pattern.

Why does this simple observation matter?

Gold is different to other commodities in that its price is not set by supply and demand from the real economy. It is set instead by speculation. This makes it very different from other metals like copper, iron, and uranium.

Trading gold is therefore largely a game of trying to figure out what everyone else is thinking. As with any game, rules emerge. And they hold so long as everyone follows them – much like in a sport.

The past few years, the rule has been “sell gold when it touches US$2,000”. We can see that in the chart above. Nothing else explains the consistent price drops at exactly that price.

This may sound like bad news for gold bulls given at the time of writing gold is hovering at US$1,980 (13 Dec). But the good news for gold bulls though is this rule appears to be changing. And as George Soros once observed, when the rules change the best investors get moving.

Gold in 2024: structurally higher gold prices?

Sell at US$2,000 has not been the only rule for gold. The two other important ones have been:

1. The gold price moves inversely to the US dollar;
2. The gold price moves inversely to real yields on the US 10 Year Treasury.

Investors may take comfort in knowing these two rules are a bit more robust than “sell gold at US$2,000”. Better yet: these rules have economic fundamentals behind them too.

What are they? Commodities like gold trade in the international market in US dollars – yet American gold buyers are the minority. When the US dollar becomes more expensive, it makes it harder for non-Americans to buy gold, thereby blunting demand. When real yields on the US 10 year are high, investors can make a solid return while taking no risk (either in cash or US government bonds). This then blunts the appeal of gold too as it requires investors to take risk to get a return. Hence gold moves inversely to both these things.

What has been remarkable about 2023 is that gold prices have stayed high despite the fact that the US dollar has sat near 20-year highs for much of the year. And despite the fact that real yields are at or near their highest 90th percentile at most points in the curve over that same timeline (graph above).

Going into 2024 what this means is that should central banks like the Federal Reserve cut rates – and consequently, should the US dollar and real yields fall – gold may finally get that extra push it needs to pass US$2,000.

And at the moment, odds are looking good. Derivatives markets are pricing the chance of the Fed cutting rates in March 2024 as at 13 Dec 50/50, according to the CME’s Fed Watch Tool. And markets have made up their mind that cuts are coming in at some point in 2024.

Going into 2024, gold looks like it has got one of its best setups in a long time. 

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Global X Physical Gold ETF (GOLD)

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