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An In Depth Analysis of How High Gold Prices May Spike in 2024

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An In Depth Analysis of How High Gold Prices May Spike in 2024

As we move toward closing out 2023, it’s always helpful to take a look at where we’ve been over the past year and where we’re likely heading in 2024. This is a good exercise to do whether it’s with your employment situation, investments, family, and for most of our regular readers, gold prices.

Depending on which index you use, the price of gold at the beginning of 2023 was roughly $1,824. At the time of this writing, which is about two weeks out from the end of the year, we’re sitting at $2,025. If this price holds through the end of the year, which is a pretty safe bet, then we’re looking at about an 11% increase.

This is a strong return considering all the volatility we’ve seen in the banking system and financial markets throughout the year. This is also impressive when you consider that higher interest rates and a strong dollar are typically a headwind for gold and silver prices. In other words gold and silver tend to do better in a lower interest rate environment and when the dollar loses value relative to other currencies in the foreign exchange market.

The Dollar Index

The U.S. Dollar Index, frequently referred to as the DXY, began the year at 104 and at the time of this writing is 102.50. While not the highest that it’s been in recent years, a 102.50 mark on the DXY means that the dollar is very strong relative to most other foreign currencies. In fact, the price of gold has reached all-time highs in most other currencies. Considering that the dollar dropped to around 70 in March of 2008 during the Great Financial Crisis (GFC), it has substantial downside risk, especially if we see a GFC 2.0.

What would cause the strength of the dollar to pull back from current levels?

Actually, there are quite a few things. For one, annual deficits and a growing national debt can and typically does put downward pressure on the strength of the dollar. At the time of this writing, we’re running annual deficits of around $2 trillion, and this is supposedly during a strong economy. Even John Maynard Keynes, after whom Keynesian Economics is named after, believed that economies should run a balanced budget and even pay down national debt during strong economic times. Clearly, that’s not happening.

The dollar’s role as the world’s reserve currency is being challenged by the BRICS alliance and other competing currencies. Rumors abound that the BRICS nations may launch a gold-backed currency, which would instantly make it the world’s most appealing currency. Furthermore, Saudi Arabia is now willing to accept other currencies besides the dollar (bye-bye petro dollar) and many nations are entering into direct trade and currency swap agreements to bypass the dollar. This all puts downward pressure on the dollar and in time, will make it less of a factor in global trade.

National Debt & Deficits

Unless you’ve been living under a rock, you’re probably aware that debt and deficits are becoming unsustainable. How has deficit spending affected our national debt situation? At the time of this writing, our national debt is quickly approaching $34 trillion. This compares to an annual gross domestic product of $26 trillion, which puts the debt to GDP ratio at approximately 130%. A GDP ratio of 90% or more is considered the tipping point. In other words, at or above this level, debt begins to be a drag on economic growth.

At the time of this writing, we have the 12th worst debt to GDP ratio in the world and are the most indebted nation by nearly $20 trillion. This is almost inconceivable to imagine, especially considering that we were the world’s largest creditor nation as recently as 50 years ago. Furthermore, it’s projected that our national debt will reach $50 trillion by the end of the decade. While GDP will presumably increase over that time, unless we have a severe and prolonged recession or depression, the expectation is that our debt to GDP ratio will rise to 150% or higher, which will put us in the top 10 (or bottom 10, depending on how you look at it) of debt to GDP nations.

What this ultimately does is cause foreign nations and domestic holders of debt to lose faith in the government and their ability to repay their debt, or in other words, make good on their bond payments. This is already playing out, as the last bond auction was a disaster. Most economic analysts rated it an “F” due to lack of demand for government debt. This is going to make it more and more difficult to continue to run up multi-trillion dollar deficits and expect that the rest of the world is going to fund our reckless spending habits.

We’re already starting to see this occur, as investors are demanding higher yields on their bond investments. This has resulted in annual debt servicing costs rising to an estimated $1 trillion a year. This is relative to estimated federal tax revenues of approximately $4.5 trillion, which encompasses an enormous percentage of tax revenues. Total spending for 2023 was roughly $6.1 trillion, which takes into consideration deficit spending, so if we compare debt servicing costs to total spending, it’s still over 16%, making it among the most, if not most costly line item in our budget.

None of the above takes into consideration rolling over our debt as it matures and refinancing at current interest rates. Most of our debt is short-term and was financed when interest rates were much lower. Over the next few years, that debt will mature, and will need to be rolled over and financed at current interest rates, unless the debt is paid off, which is highly unlikely. This will further increase our debt servicing costs even if we don’t incur another $1 of debt in 2024.

What the above portends is that the U.S. dollar will eventually lose value in the global foreign exchange market. Many countries have already started selling their debt, such as Russia and China, and others will likely follow suit as they lose confidence in the strength of the dollar. This will put downward pressure on pricing and increase bond yields, as there’s an inverse relationship between the price of bonds and bond yields.

Higher yields translate to higher debt servicing payments and effectively limits how much debt a nation can incur. For example, if the rest of the world loses faith in the dollar and begins selling their bonds, interest rates could rise to 10% in short order. If we’re paying a 10% interest rate on our debt, which is probably what it should be, that means that debt servicing costs will account for over 75% of federal tax revenue. Considering that some categories of the federal budget are non-discretionary, such as Medicaid, Medicare, Social Security and Defense, this effectively guarantees that we will never see a balanced budget in our lifetimes again.

The Banking System

You may be familiar with the term “black swan.” This term was made popular by Nassim Talib, who wrote a book under the same title in 2007. A black swan is effectively a rare occurrence that could not have been predicted. Every year we’re surprised by black swan events, and 2024 is likely to be no different. In our opinion, one of the most likely black swan events in 2024 is a potential collapse of the banking system. If you recall, three major banks went bankrupt in March and April of 2023, namely Silicon Valley Bank, First Republic and Signature Bank. The total assets of these three banks alone surpassed the total dollar value of all bank collapses during the GFC. Since then, we’ve had a few smaller local and regional banks go bust, but none of great significance.

There’s a reason why we haven’t seen a flood or wave of bank failures since the spring of 2023, and that is due to the Fed rolling out the Bank Term Funding Program (BTFP) in March of 2023. This program allows banks to pledge their underperforming treasury bonds and mortgage-backed securities to the Federal Reserve for their full face or par value. Of course, we all know that these assets are only worth a fraction of the par value, as interest rates have exploded since they acquired these securities.

As an example, most of these banks purchased treasury bonds and mortgage-backed securities when interest rates were much lower. Let’s call it 1% – 3%. If the market is now yielding 5%, no one in their right mind would purchase a bond yielding 1%, which is why the market value of these bonds is substantially less. In some cases, it may only be 40% – 50% of the value – especially for longer term bonds, which have more interest rate risk. This means that if banks need to free up capital, they’ll need to sell their bond holdings at a discount. This is exactly what happened to Silicon Valley Bank. They received more redemption requests than they had liquidity, which caused them to redeem their treasury holdings for pennies on the dollar.Federal Reserve Rock and Hard Place Monetary Policy

The BTFP is a one-year program, which is set to expire on March 11, 2024. If it expires, and is not renewed, we’ll likely see a wave of bank failures beginning in the spring of 2024. Of course, this isn’t a guarantee, but is likely, as usage of the BTFP is currently at an all-time high. The chart in the link provided shows that the Federal Reserve has provided over $121 billion in liquidity to banks. If the banking system was on solid footing, there would be no need to utilize this program, and in fact, we would see a sharp decline in usage.

If there is another bank panic and the program is no longer in effect, we’ll likely see a cascade of bank failures. We predict that it will be those financial institutions that have a large exposure to commercial real estate, most notably office and retail, as well as construction loans. At present, the housing market is experiencing issues with fewer loan originations, fewer sales, and a lower average price realized per sale. We saw a huge spike in gold prices and demand following the March of 2023 event and will likely see an even greater flood into precious metals when the next crisis occurs.

Interest Rates

Thus far, we’ve talked about debts, deficits and the banking system, but these aren’t the only factors that affect gold prices. As we mentioned above, high interest rates (although, in reality, they’re not historically high) have been a headwind for gold prices, and even so, we’ve managed to post an 11% return in gold prices through mid-December.

It’s difficult to predict what the Federal Reserve will do with interest rates in 2024. The Federal Funds rate of 5.25% – 5.5% has seemed to have a positive impact on inflation, which has fallen from a high of 9.1% in June of 2022 to 3.2% through November of 2023. If the Fed is resolute in reducing the inflation rate to 2%, then they’ll likely keep interest rates higher for longer. However, a slowdown, recession or a repeat of the GFC could cause them to pivot by cutting interest rates and pursuing a loose monetary policy.

If this happens, then we would expect to see gold prices increase, as the price of gold typically has an inverse relationship to the strength of the dollar. Lower interest rates and quantitative easing tend to weaken the dollar, as the Fed is reducing the Federal Funds rate while at the same time increasing their monetary base. They do this to purchase longer term bonds and mortgage-backed securities in an attempt to reduce mortgage rates and stimulate growth.

This flood of liquidity may be a short-term fix but will have long-term negative ramifications. When the Federal Reserve intervenes in the markets, they affect the market cycle. Austrian economists typically refer to this as the boom-bust cycle. In a nutshell, at the beginning of the cycle, the Federal Reserve will pursue a loose monetary policy to stimulate growth. Companies that otherwise wouldn’t be able to start or continue to operate are only able to do so due to artificially cheap money. While this stage of the cycle usually gives the appearance of strong growth, it ultimately causes a substantial amount of malinvestment, which is cleared during a recession. A recession typically occurs after the Federal Reserve realizes that the economy is overheating (i.e. high inflation) and raises rates to slow things down.

You may have heard the terms “soft landing” or “no landing.” Basically, the Fed attempts to cool growth and tame inflation while at the same time “land the plane” so that it has very little to no impact on the economy. Historically, this has been next to impossible to orchestrate, and in nearly all cases, we ultimately find ourselves in a recession when the Fed tightens interest rates.

We can see this as it respects the yield curve. An upward sloping yield curve is typically indicative of a normal functioning economy. A yield curve begins with 30-day treasury bills and goes out on the horizontal plane to 30 years. When you agree to commit money for a longer period of time, you expect to receive a higher return. There’s the time value of money to take into account as well as inflation.

At present, the yield curve is inverted. In other words, short term treasury bills and notes are paying higher interest rates than longer term treasury bonds. This logically doesn’t make sense and it’s only a matter of time before it is corrected. We typically see the yield curve “un invert” or correct by a drop in short-term interest rates as opposed to the longer-term interest rates rising. In other words, at present, if the 30-day treasury bill is yielding 5.5% and the 30-day treasury bond is yielding 4.3%, the most likely scenario is that the Fed will lower short term interest rates causing the yield curve to steepen and correct.

US Treasuries Yield Curve
US Treasuries Yield Curve as of 12/12/2023

The only issue with a yield curve that corrects is that 95% of the time this results in a recession. Historically, the Federal Reserve attempts to print its way out of a recession. Furthermore, if it’s deep and prolonged enough, we may not only see the Fed work its monetary magic, but we may also see the federal government pull out all the stops by issuing stimulus checks and pausing student loan payments and possibly mortgage or rent payments. This is exactly what we saw in 2020, so there’s precedence for this type of response. Monetary and fiscal stimulus will further weaken the dollar, as it will accelerate the pace at which we reach the $50 trillion debt mark.

Real Interest Rates

Last, but not least, the issue of real interest rates should be taken into consideration when attempting to forecast the future price of gold. Historically, but not always, when investors have the option to invest in a security, whether it be a stock or bond, that has a strong inflation-adjusted return, oftentimes, they view these investments as preferable to gold.

As an example, let’s say that the inflation rate is 3% and that 30-year bonds are yield 8%. In this case, your real inflation-adjusted return is 5%. Considering that treasury bonds are considered risk-free investments (in reality that’s not the case), most people would opt for a 5% real return on a risk-free investment. However, when the interest rates on bonds are less and/or inflation is high, real returns (inflation-adjusted) on these investments may be nominal, if not 0%. Case in point, when inflation was running 9.1% in June of 2022, all bond investments were yielding a negative real return.Real interest rate v gold price

Since gold doesn’t provide dividends, even though the long-term returns have been approximately 8% since we went off the gold standard in 1971, it’s oftentimes not as appealing of an investment to the general public as investments that provide healthy inflation-adjusted returns. Most technology companies don’t pay dividends and the current dividend yield of the S&P 500 is 1.6% (down from 1.8% last year), so investors looking for inflation-adjusted return aren’t going to find it with most investments.

This is an investment thesis that we’ll be watching closely in 2024. If we see inflation drop to the Fed’s goal of 2% and interest rates rise above current rates, this may provide enough incentive for investors to move their money into the bond market. However, we suspect that inflation is going to remain stubbornly high in 2024 and that interest rates will likely decrease due to the Fed’s open market operations, which will ultimately be bullish for gold prices.

Summary

We’ve covered a lot of ground today, so let’s recap.  We briefly touched on the dollar index and how historically there has been an inverse relationship between the strength of the dollar and the performance of gold. The dollar index has remained strong throughout 2023. Even so, we’ve seen gold clock in a 11% return year to date, which bodes well for the price of gold in 2024.

There’s no doubt that annual deficits and our national debt have an impact on gold prices. With annual deficits running close to $2 trillion and our national debt exploding to nearly $34 trillion at present (projected to be $50 trillion by the end of the decade), there’s no question that we’re edging closer to a financial collapse. The more concerned investors become about our debts and deficits and our ability to service our debt payments, the higher we can expect gold prices to rise.

If you think that we’re out of the woods with the banking system, think again. If it weren’t for the BTFP, we likely would have had a domino effect of failing banks. The Fed’s program has temporarily helped to stabilize the banking system, but it’s set to expire in March of 2024. If it’s not renewed, expect for a wave of bank failures. What do investors do when they’re concerned about the stability of the banking system? They liquidate their accounts and park their funds in a safe haven investment, such as gold.

The Fed has raised interest rates from nearly 0% to 5.5% in a year and a half, which is the shortest time frame for such an increase in history. This has helped to bring down the official inflation rate but is also having negative effects on the economy. We’ve had an inverted yield curve for nearly 14 months, which will inevitably correct. Once it does, we’ll likely head into a recession, and expect that the Fed will ramp up the printing press, which historically has been positive for gold.

Finally, we touched on the issue of real interest rates and how the general public typically views gold as a more appealing investment option when real interest rates are low. That is currently the case in the bond and stock markets, so unless this changes, gold is going to continue to be an appealing investment option.

While we don’t have a crystal ball, it would not be unreasonable to see another 10% increase in the price of gold in 2024. Nor is $2,500 out of the realm of possibility. While not investment advice, it’s our personal belief that there are as many reasons to be bullish on the future price of gold as there have ever been.

Contact the experts at Atlanta Gold & Coin Buyers today to begin or increase your investment of gold coins or gold bars. We have a wide selection of options and can help guide investors on some of the best options that might fit their needs and investment goals.

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Tony Davis
Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer specializing in buying, selling and appraising coins and coin collections of all types and sizes. Tony frequently writes on various economic and numismatic related topics affecting the coin and bullion markets and has been published on some of the industry’s leading websites, including Coin Week, the American Numismatic Association, Coin Collector, Coinflation, and Coin Auctions Help, just to name a few. Visit Atlanta Gold & Coin’s website at atlantagoldandcoin.com to obtain additional information on the products, services and educational resources offered by his company. Tony can be reached at sales@atlantagoldandcoin.com or at 404-236-9744

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