2023 has felt like the crest of a wave. A wave of inflation, a wave of interest rate hikes, a wave of uncertainty. Whether, when and how this wave will break in 2024 is the million-dollar question. The answer is gold.
1. Long Term price
Gold is a great investment for the long term and has been the best-performing asset of the 21st century. There are always going to be fluctuations in the price of gold within shorter time frames, but patient long-term investors have enjoyed an upward trajectory for centuries.
Forecasts by analysts, investment banks and gold investors cover a wide range of outlooks, but many expect the price to continue to rise this year. With prices in December around $2024 an ounce, UBS analysts forecast $2,100 by year-end 2023 and $2,200 by March 2024.
Globally the World Gold Council’s 2024 outlook for gold is a mixed picture, with demand being driven by the wider economic environment. The gold body believes that if the global economy deteriorates and the risk of recession increases, more people will turn to gold, supporting a rise in price. With heightened geopolitical tensions in a key election year for many major economies, outcomes for the global economy are uncertain.However, if there is a ‘soft landing’ and a US recession is largely avoided, gold could remain ‘neutral’.
This outlook only incorporates a short-term view at the start of the year. Investors should recognise that there are many factors affecting the gold price while acknowledging that the trend is upward over the longer term.
2. The foreshadowing of recession
The global inflation crisis appears to have peaked, with price rises slowing in many developed nations. However, in order to put the brakes on rampant inflation, interest rates around the world have been rising at their fastest pace in decades. This means the rising cost of goods is being compounded by the rising cost of debt. Mortgage costs are surging, and the effects will be felt for some time as these costs only flow through to consumers when their fixed terms come to an end.
In the UK, 1.4 million people came off of fixed mortgages in 2023, according to the Office for National Statistics, and the Bank of England raised rates for the 14th time in August. The fallout of the mortgage rate rises is just finally filtering through. House prices fell at the their fastest annual rate in 14 years in July, down 3.8% compared to the previous year according to Nationwide. And the impact is spreading beyond consumers to businesses as well. The S&P Purchasing Managers Index, which measures the performance of the manufacturing sector, has been below 50 for 12 months, indicating a slowdown in activity, and in July recorded its lowest level this year.
A recession, or even very low growth, can have a negative impact on markets as companies hold off on investments or even go out of business. During these times of market uncertainty, investors look to protect their assets with safe-haven investments like gold that tend to rise when other assets are falling.
3. Shaky Alternatives
For years most saving accounts offered practically no interest. Now that interest rates are on the rise, savings accounts are paying more than the near 0% they paid when rates were so low for so long. Easy access accounts can pay up to around 5% and fixed or regular saving accounts (with restrictions) can be found for up to 7%. But this still won’t beat out current inflation levels. The Consumer Price Index was 7.9% and the Retail Price Index (which includes mortgage interest payments) was 10.7% in June.
Property investment is a very risky option at the moment. The rapid and steep rise in mortgage rates, reduction in mortgage offers, and increase in mortgage repayments are all conspiring to depress the property market, pushing prices down at their fastest rate in 14 years. The number of homeowners coming off very low fixed rate deals in the next few years will only exacerbate this situation. A glut of sellers coupled with buyers struggling to secure mortgages with interest rates at multi-year highs, means the outlook for the property market is very uncertain.
Equities are at a similar level to this time last year, but this belies the volatility that has impacted the markets over the past year. This volatility could continue as the economic stresses of a potential recession and yet another rate rise put more pressure on consumers and businesses. Trying to call the top or the bottom of the market is a fool’s game, but holding a diverse portfolio of assets allows investors to spread the risk.
When markets are falling, gold is often rising as investors look for a safe haven during uncertain times. Gold is also more liquid than property assets, and while it doesn’t pay interest, the long-term growth trajectory offers the possibility of outpacing inflation, whereas cash in the bank is guaranteed to lose some value.
4. Diversity
The number one rule of investing is to diversify your assets. This can be taken to mean investing in different types of stocks and companies, but that won’t protect you when the entire stock market is shaken by global events like a pandemic or recession. So, it’s also necessary to diversify the types of assets in your portfolio, which means considering stocks, bonds, property, commodities and alternative assets as well.
Gold is a prime diversifier. It’s important because it is viewed as a safe-haven asset, so it tends to rise when other investments are falling. Because its value often moves conversely to other investments, it can bring protection when markets turn – so including gold in your portfolio can lower your overall risk profile. In addition, as a commodity, it tends to rise alongside the price of goods, which can help to hedge against inflation.
5. Tax Savings
We all have to pay tax on our income, including any gains we make on investments; such as savings, equities, bonds and property, but physical gold is an exception. When you invest in tax-free gold you can legitimately avoid paying tax on your gains, depending on individual circumstances. It’s a very similar product to an ISA but with none of the restrictions or penalties on early liquidation. Furthermore, you are able keep and control your investment. Many people use physical gold as an efficient form of tax planning, to minimise inheritance tax too.
Physical gold and silver demand has been increasing at Arabian Pure Gold as concerns about the economy continue to grow. Central banks are buying gold, and the outlook for the precious metal is positive. Countries and retail investors are all turning to the precious metal and many analysts are predicting a rise in gold prices this year. There are so many uncertainties in our economic and political landscape; investing in gold is a tried and tested, tax-efficient way to protect and grow your wealth.
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