Fear, Greed & Ten Reasons to Buy Bullion in 2024

Gold recorded solid gains in 2023, with the precious metal rising by approximately 13%, and finishing the year trading above USD $2,050 and AUD $3,000 per troy ounce (oz).

While silver lagged gold performance wise across the year as a whole, it also finished 2023 on stronger footing, rising by more than 10% in the final quarter of the year.

The increase in precious metal prices has been particularly notable given it has occurred against a backdrop of:

• A rebound in global property prices

• An easing in global headline inflationary pressures

• Continued outflows from gold ETFs, and

• A stunning resurgence in the stock market that has seen CNNs Fear and Greed Index (see below image) approach the end of the 2023 with an Extreme Greed reading.

  

Investors also ended last year with an underweight position in commodities relative to bonds that has not been seen since 2009, according to the latest Bank of America Global Fund Manager Survey.

Combined, the above factors bode well for the outlook for gold and silver bullion in 2024, with multiple factors likely to become tailwinds propelling precious metals higher, especially given the evolving economic and financial market backdrop investors will have to navigate.

Below, we highlight ten reasons why investors may wish to add precious metals to their portfolio in 2024.

Momentum – winners keep winning
Gold has been in a secular bull market since the turn of the century, with the precious metal rising from below USD $300oz oz to more than USD $2000oz, while in Australian dollar terms, prices have increased from below AUD $500oz to more than AUD $3,000oz over the same period.

While all bull markets eventually come to an end, there is no sign of exuberance in the precious metal market today.

Indeed, quite the opposite, with a range of indicators suggesting the current precious metal bull market cycle has much further to run. These indicators include:

• Investor flows

• ​Speculative positioning

• Exuberance in risk assets

• Media headlines that continue to question the value of gold

Finally, history shows us that previous precious metal bull market cycles saw gold and silver deliver returns that dwarf what they’ve generated in this cycle so far.

Silver is cheap relative to gold

The gold to silver ratio ended 2023 just below 87, meaning it requires almost over 87 ounces of silver to be able to afford one ounce of gold. Historically this number has averaged closer to 60, while at the top of precious metal bull markets, this ratio has fallen toward 30.

The fact silver is so cheap relative to gold (based on this ratio) is very encouraging, as it signifies the bull market in precious metals has much further to run, with silver likely to outperform in the years ahead.

As a way of visualizing potential silver outperformance relative to gold inside a precious metal bull market, consider the table below. It shows potential gold and silver returns based on the gold price rising from current levels near AUD $3,000oz to AUD $6,000oz, and the gold to silver ratio declining from 87 to 40.

While investors in gold would double their money, silver investors would see a return of almost 350% in such a scenario.

The potential for silver outperformance is only strengthened by the ongoing supply and demand imbalance in silver, with 2023 set to see a 140 million ounce difference between total supply (1,002 million ounces) and total demand (1,143 million ounces), as highlighted in the table below.

Interest rates are set to fall
Gold tends to thrive in periods interest rates are falling, as investors seek alternative investments given the money in the bank that they are holding in the bank will offer lower rates of interest income.

This should be one factor helping gold thrive in 2024 and beyond, with interest rates set to decline almost non-stop between now and late 2025, as evidenced in the chart below.

Recession risk and a falling AUD
Australian investors in precious metals not only benefit from potential price increases in gold and silver directly.

They can also benefit from potential weakness in the Australian dollar, which boosts the value of gold and silver in Australian dollars.

For example, a USD gold price of $2,000oz and an AUDUSD FX rate of $0.70 equates to an AUD gold price of $2,857oz. The same USD $2,000oz gold price with a AUDUSD FX rate of $0.60 equates to an AUD gold price of $3,333oz.

This is particularly relevant for the outlook for gold and silver in 2024, as there are heightened chances of a global recession, with recessions typically seeing the Australian dollar fall significantly.

Indeed some analysts see the Australian dollar fall into the USD $0.40-$0.50 range in the next recession.

Should that occur, it will magnify the returns Australian investors will generate from their precious metal holdings.

Central banks to keep buying
Since the Global Financial Crisis hit just over fifteen years ago, central banks have been net buyers of gold, with total holdings increasing every single year.

This development has profound long-term implications for gold, given it illustrates the re-emergence of the precious metal as a highly liquid zero credit risk asset that is instrumental in managing nation state finances.

The last two years have seen particularly strong buying, as illustrated in the chart below (sourced here), with more than 1,000 tonnes of gold bought by central banks in 2022, and the better part of 800 tonnes bought in 2023 so far.

Central Banks – Net Gold Purchases – 2010 to 2023

ETF holders to re-enter market
Over the last three years, investors in gold ETFs have trimmed their holdings.

This has been one of the factors that has kept gold range bound, with the precious metal oscillating in a circa $200oz price band between USD $1,850 and USD $2,050oz.

In 2024, there is a good chance this segment of the market will become net buyers.

And as per the chart below, which shows a historically strong correlation between an increase in gold ETF holdings and a rising gold price, a return to inflows into these products should add upside pressure to the gold price.

Speculators to add to their positions
While most precious metal investors, including our clients at ABC Bullion show a strong preference for physical bullion in cast bar, minted tablet, or coin form, there is also a highly liquid market for gold futures.

Speculators are users of the gold futures market, as they tend to only want price exposure, rather than physical possession.

In certain periods, these speculators can add significant upside pressure to the gold price, and in other periods, they can contribute to sell-offs.

Critically, they also serve as an important sentiment indicator, as periods where the price is rapidly rising tend to see an increase in bullish bets (or longs) on gold, meaning speculators are positioned to benefit from further price rises. Conversely, in periods the market is falling, it is normal to see an increase in bearish bets (or shorts).

As we enter 2024, the market is showing no sign of exuberance from this segment of the market at all, with gross long positioning sitting at barely half the level it was back in early 2020, when gold was also trading just above USD $2,000oz.

That is a very encouraging sign, as it means speculators have substantial room to add to their bullish bets, which can add further upside to the gold price.
 
Expensive share markets at risk of falling
One of gold’s best attributes is its outperformance in ‘risk off’ periods, when stock markets tend to tumble.

Indeed, research from both the World Gold Council, and other investments houses including AQR suggest gold has been the best single performing asset class in periods shares fall.

That is likely highly relevant given markets are exhibiting signs of extreme optimism (as per the CNN Fear and Greed Index referenced at the start of this blog), as well as the most recent AAII sentiment poll which shows there are 32% more bulls than bears right now.

Markets are also expensively priced heading into 2024, with the S&P 500 for example trading at more than 30 times cyclically adjusted earnings (see chart below). In practice this means that if you buy a ‘share’ of the S&P 500 now, it will take until 2054 for the companies that make up the S&P 500 to earn the money you are paying to buy their stock today.

That is exceptionally high by historical standards, and suggests markets are at risk of a major correction, much like occurred back in 2001 when the NASDAQ bubble burst, in 2007-2009 when the GFC hit, and 2020 when COVID first emerged.

Gold thrived in those environments. It may do so again.

Inflation still a problem
While inflation rates have eased across the course of 2023, it is far too early to declare the battle is over. Indeed, in the United States, headline inflation is still sitting at 3.1%, with core and median inflation running at 4% and 5.2% respectively.

Australia continues to face a cost-of-living challenge too, with inflation running at 5.4% in the year to September 2023. That is more than double the mid-point of the RBAs 2-3% target range.

Given gold and silver tend to thrive in period of high inflation (gold averages annual gains of close to 15%, and silver averages annual gains of closer to 18% when inflation is 3% or higher), one can expect them to be well supported by those investors seeking a trusted hedge against rising consumer prices.

Geopolitical risks
Finally, there is also the potential for gold to get a safe haven bid from investors seeking a hedge against persistent geopolitical risk, with conflict in the Middle East and the war between Ukraine and Russia set to continue for at least part of 2024.

Summary
Given the above factors, there are multiple reasons to want to include a meaningful allocation to gold and/or silver as part of a diversified portfolio today.

These assets provide diversification benefits, liquidity, long-term returns, outperformance in parts of the economic cycle, and are tangible, with an unmatched track record of preserving wealth.
They may prove to be one of the most important assets to hold in the years ahead.

Talk to one our expert sales and client service staff
To discuss investing in precious metals with ABC Bullion, please visit abcbullion.com, or call our sales and client service team at 1300 361 261.