Understanding the gold market is a bit like solving a 3D jigsaw puzzle. There are many permutations and different considerations that need to be factored in, many of which are contradictory to each other.
Interest rates, exchange rates, physical buying, ETFs as well as geopolitical sentiment all get thrown into the mix when forecasters try to guess where the price of the yellow metal might land in the future.
In 2023, gold has already been one the better performing commodities up 17.4% in both US and Australian dollar terms, with the US price at $2,041/oz and the Aussie dollar price sitting at $3,085/oz.
An avid gold bull, Reg Spencer from Canaccord Genuity was talking up the metal at the recent Noosa Mining Conference predicting it will soar even higher in 2024.
Whilst geopolitical tensions in Ukraine and more recently the Middle East have provided support for the gold price, Nicky Shiels, head of metals strategy at MKS PAMP, argued in a recent note that the geopolitical safe haven status was starting to wane.
That left some commentators scratching their heads, as they looked for reasons why the price has continued to maintain positive momentum, with a record price of US$2,100/oz firmly within reach.
As we’ve noted, exchange rate movements play a part in the movement of the gold price. A single statement this week by one of the more hawkish voting members of the US Federal Reserve might have been the impetus to continue the dollar’s decline (and therefore strengthen gold).
Christopher Waller, a voting member who has also been a Fed Board Governor since 2020, told a US think tank that he was increasingly confident that ‘policy is currently well-positioned to slow the economy and get inflation back to 2%’.
Most importantly he suggested that the Fed could start lowering rates if inflation continues to decline “for several months”, adding that, “There is no reason to say we will keep it really high.”
Analysts from Bank of America agree the current positive trend is a bit hard to understand, noting that there hasn’t been the buying up of physical gold ETFs that was seen at the start of the Covid pandemic.
According to the Bank’s analysts, this confirms their view that, “beyond an oil-related price spike, the next sustained leg higher in gold prices is unlikely to come until rates start falling.”
However, they aren’t talking the metal down. The crystal ball gazers see the gold price hitting US$2,400/oz by the end of 2024, which interestingly, is up by the same percentage margin (+17%) as the gains over the last year.
For Australian gold bulls (and gold producers), this would equate to a further A$525/oz gain to A$3,600/oz assuming today’s exchange rate. This will be welcome news to unhedged producers that can realise these higher prices.
For a 100,000ozpa producer, it equates to an extra A$52 million (pre-tax) in the kitty, while for the majors punching out 500kozpa or more, there is potentially an extra $250 million to be captured.
This is no small change and is likely to flow through to exploration spending and further consolidation in the sector.
However, the last word on predicting the gold price goes to Australian gold consulting group, Surbiton Associates, where Dr Sandra Close noted recently that “Using tools such as trend lines, support and resistance levels, moving averages and Fibonacci retracements are about as useful in predicting the price of gold as studying the entrails of a chicken.”
But hey, don’t knock it until you try it.
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