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Gold’s prospects brighten despite soft landing expectations: Three key factors to watch

Inflation data from the United States has reinforced the belief in a Goldilocks-style soft landing for the economy in the coming year. Despite this, there are compelling reasons to keep an eye on the precious metal as a viable investment option. While historically, gold has shone in times of economic turbulence, certain factors in 2024 could maintain its appeal even in a stable economic environment.

Central Banks and Gold Reserves
Central banks worldwide are increasingly looking to bolster their gold reserves. These institutions prioritise liquidity and stability over returns, making gold an attractive choice. Recent geopolitical shocks, such as Russia’s annexation of Crimea and the 2022 Ukraine war, have prompted central banks to diversify their reserves away from US dollar-denominated assets. In 2022, central banks purchased a record-breaking 1,136 tonnes of gold, and the trend continued with another 800 tonnes bought in the first three quarters of 2023. Emerging economies like China and Turkey led the way in gold acquisitions for their central bank reserves.

China, in particular, has become a major player in this arena, accumulating 181 tonnes of gold in the nine months leading up to September 30, 2023. Despite this, gold represents only about 4 percent of China’s total reserves, leaving ample room for expansion. In comparison, Russia and Turkey allocate a significantly higher percentage of their reserves to gold. A survey by the World Gold Council revealed that a substantial portion of central banks, both in emerging and developed economies, intends to increase their gold holdings over the next five years, aiming for allocations as high as 16 percent or more of their total reserves.

Chinese Households and Gold
China’s households, historically the world’s largest consumers of gold, may also drive demand. China’s stringent capital controls and underdeveloped financial markets limit options for wealth management. Traditionally, Chinese households have turned to real estate, local equity markets, and bank deposits. However, if the government struggles to stabilise property prices effectively, households might increasingly turn to gold as a means of preserving their wealth.

Gold as a Hedge Against Geopolitical Uncertainty
In 2024, gold may play a more significant role as investors seek refuge from macroeconomic and geopolitical risks. The upcoming year features elections in numerous countries, with more than half of the global population participating in leadership decisions. The outcomes of these elections could lead to significant policy shifts in critical nations, including the United States, Taiwan, and Mexico. Such developments have the potential to exacerbate geopolitical uncertainty, potentially dampening growth expectations and steering investors toward assets like gold that historically perform well in times of heightened uncertainty.

In conclusion, while expectations of a soft landing for the US economy may steer investors towards stocks and bonds, gold’s allure remains strong. Factors such as central banks’ ongoing interest in gold reserves, Chinese households seeking wealth preservation, and a turbulent geopolitical landscape could all contribute to the continued shine of the precious metal in the coming year. As we approach 2024, gold’s role as a reliable asset in times of uncertainty and as a hedge against geopolitical risk may become increasingly prominent in the global investment landscape.

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