The supply of precious metals that is excavated from developing economies — and the demand for it — stands to considerably impact the price of gold, silver, and other assets in 2024, says Kevin DeMeritt, founder and chairman of Los Angeles-based Lear Capital.
The demand for gold, in particular, could be significant, given that, in recent years, we’ve seen a number of emerging- and established-market countries enthusiastically purchase it, even though they’d previously seemed to favor U.S. Treasury securities — due to the assurance, the nonpartisan Peter G. Peterson Foundation says, that the U.S. government would honor the securities’ associated financial terms.
“Russia has completely eliminated all of their reserves of U.S. Treasurys, and what did they replace most of it with? Gold,” Kevin DeMeritt says. “Same thing with China — they’ve sold off U.S. Treasurys. They’ve been replacing that with gold.”
Looking Ahead
Supply constraints are becoming a growing influence in the metals market, according to a late 2023 report from S&P Global Market Intelligence, which says softer consumption from sectors such as construction and automotive may have somewhat lessened demand.
Other factors, like increased labor and operating costs, have cut into precious metal profitability, S&P says, which might prompt mining companies to close some locations to remain solvent. All of those elements could impact precious metal prices in 2024.
Increased operational expenses have been a mounting mining challenge for years. More than a decade ago, Lear Capital reported the industry was grappling with growing labor, utility, machinery, and other costs.
However, despite those concerns, noting that — amid events such as the emergence of the Israel-Hamas war — gold prices rose fairly steadily in 2023’s final quarter, S&P’s report suggests they will also increase in the coming year, especially if interest rate cuts occur.
Higher interest rates can hike up borrowing costs and prompt investors to focus on U.S. Treasurys because elevated interest rates tend to increase Treasury yields, according to CNN Business.
Since bumping the target range for the federal funds rate up to 5.25% to 5.5% in July 2023, the Federal Reserve’s Federal Open Market Committee has kept it at the same level for months.
If the FOMC begins making rate cuts in 2024 — which the projection it released in December 2023 indicates could happen — and U.S. Treasury yields fall, gold may start looking like a more attractive investment option to some portfolio holders.
Yet even if interest rates remain the same, geopolitical conflicts, according to S&P Global Market Intelligence, in tandem with ongoing strong demand from central banks, could keep nudging gold prices higher.
Central banks did a record amount of gold buying in 2022 — ultimately resulting in a 152% increase from their purchasing activity the year before.
Central banks, according to Lear Capital, “know that throughout history, whoever holds the most gold has the most power.”
“We have not seen this kind of buying for 50 years,” Kevin DeMeritt says. “They purchased a quarter of all the mining supply, which is a huge jump from where they were purchasing — and they continued their record buying throughout 2023.”
The most recent World Gold Council report on central bank activity revealed central bank gold buying maintained a brisk momentum in November — with major buyers hailing from all emerging markets. Throughout 2023, in fact, the organization said emerging-market banks had been the main factor driving both gold purchases and sales.
In its recently published fourth-quarter commentary, the WGC said it believes central bank buying, along with the potential risk of a recession and other economic conditions, will influence gold’s performance in the future.
Due to elements such as central bank interest and global political unrest, S&P anticipates that while the gold market could see some variable activity this year, prices may reach historically high levels.
Widespread uncertainty, according to Kevin DeMeritt, has helped fuel gold price increases in the past.
“When investors are worried about the economy, usually you get more people turning to gold, which can drive up its price,” he says. “We’re starting to see that more and more.”
The Demand Horizon
Mining.com reported in late December that gold and silver had both performed fairly well in 2023, even with the Fed raising interest rates throughout the year.
Gold, according to the mining industry news site, had gained nearly 13% year to date by Dec. 22; silver, which began the year at approximately $24 per ounce, was slightly up at $24.29 an ounce by that point — and had reached higher levels during the year, such as its climb to more than $26 in May.
The Fed’s monetary policy, government spending-driven high debt, and robust central bank buying all stand to influence the price of gold, according to mining.com, which noted Treasury bond yields had already fallen between November and December.
Concerns about America’s approach to mingling foreign and monetary policy that arose when the U.S. government levied economic sanctions against Russia after it invaded Ukraine could also play into gold demand and prices, according to Kevin DeMeritt.
“We’ve weaponized the dollar against countries, for different things, and they want nothing to do with that,” he said in a recent video shared on Lear Capital’s YouTube channel. “They want a currency that they can rely upon, that they can trade freely with.”
If central banks from emerging and other markets increasingly turn to gold, the supply of the precious metal could become even more strained.
“They hold that metal for 10, 15, 20 years at a time,” Kevin DeMeritt says. “So that metal is gone — and you’re not talking about small amounts. If a recession takes hold [and] we start to see more financial instabilities happen around the country, and around the world, the demand from central banks could intensify — along with the demand from institutional and individual investors.”
