Interest rate cuts are widely expected in 2024 as the war on inflation appears almost won and continual calls for a recession that kept getting postponed finally land.
Against that backdrop, all three major U.S. stock indexes posted double-digit gains in 2023, with most of those gains coming in November and December. Canadian stocks ended 2023 solidly in the green and bonds also posted gains.
But gold surged in the fourth quarter and that typically serves as a reminder that a lot of uncertainty is still out there. Deutsche Bank noted that gold returned 13 percent over the two-year period from 2022 to 2023—the second-highest return among a wide range of 29 financial assets including the S&P 500 and U.S. Treasurys.
Gold’s Time to Shine?
A key theme expected to drive financial markets in 2024 is a weaker U.S. dollar as the markets price in the U.S. Federal Reserve cutting interest rates multiple times.A lower U.S. dollar benefits commodity prices, and gold is back in the spotlight for 2024 as numerous analysts call for it to continue its late-2023 rally and hit new record highs.
Gold historically serves as inflation protection and is seeing significant buying by central banks and consumers. Other factors supporting its price rise are the ongoing wars and uncertainty.
Gold hit a record high on Dec. 4 at US$2,135.40 after U.S. Fed Chair Jerome Powell signalled the end of rate hikes. Gold began skyrocketing around when Hamas attacked Israel on Oct. 7.
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Max Baecker, president of American Hartford Gold, told Epoch TV’s “Facts Matter“ that gold offers an insurance policy given major changes happening across the globe and the uncertainty of the upcoming U.S. presidential election.
Mr. Baecker advised doing what central banks, especially China’s and Russia’s, are doing—stocking up on gold. Given the amount of global debt, they are moving as much money as they can into a store of value in case of some kind of a meltdown, he said.
“Gold is the only real money out there—everything else is just credit,” Mr. Baecker said after pointing out that cryptocurrencies are not “digital gold” since they have counterparty risk from dealing through an exchange.
“Things [are] lining up for a perfect storm for gold in 2024,” he added. He also suggested that if gold prices get significantly higher, what might be going on in the world geopolitically and economically may not be pleasant.
Warning Signs
Inflation is almost back to within its target range of 1 to 3 percent, but the Bank of Canada is not declaring victory and remains inclined to keep raising rates.Furthermore, entrenched factors like aging populations and lower unemployment, reshoring of supply chains, and the move toward renewable energy support higher inflation.
“To us, this means a higher-for-longer fight against inflation and a higher base [interest] rate,” said investor Larry Berman, co-founder of ETF Capital Management, in his market forecast for 2024 on BNN Bloomberg on Dec. 18.
“We expect to see high inflation due to the clean energy shift that will not stop despite the recent weakness in the sector,” he added.
Most economists and financial markets participants expect central banks to start bringing down interest rates around mid-year and for a mild recession to give way to an economic rebound in the second half of the year.
The Bank of Canada expects 2025 to be a year of very strong growth.
But Heritage Foundation economist Peter St Onge said on Dec. 30 that the U.S. Fed cutting rates while inflation is still high suggests not a mild recession upcoming but instead a “monster” and that it is sowing the seeds for 1970s-style stagflation—poor economic growth and high inflation.
Mr. St Onge also added that foreign central banks can’t cut rates until the Fed does, to avoid having their country’s capital flowing to the United States in search of higher yields.
Economic Realities
Stock and bond markets can be disconnected with economic realities on Main Street. For example, affordability isn’t expected to improve as prices rise only more slowly after two years of rapid increases have taken them to an elevated level.Businesses and consumers are continuing to adapt to the new normal of higher interest rates, and a slowdown in consumer spending is predicted as mortgages continue to renew at higher rates.
RBC says, in its “Navigating 2024” analysis published Dec. 14, that financial stress will grow for consumers resulting in a reduced demand for discretionary items, higher delinquencies, and insolvencies.
The feds need to be concerned about Canada’s triple-A credit rating, given that government spending is now coming back to roost, RBC noted. The Bay Street bank says that federal and provincial governments have little room to manoeuvre fiscally.
Governments also face higher interest rates, and Oxford Economics says in its 2024 key themes note published Dec. 21 that only targeted fiscal measures are forthcoming from Ottawa.
Oil and the Loonie
After a roller-coaster ride in 2023, oil prices are likely to stay near US$80 a barrel, according to a Dec. 29 Reuters poll. The offsetting factors, according to the poll, are weak global growth dampening demand while geopolitical tensions provide support.“The Canadian dollar now largely dances to the tune of the U.S. dollar itself,” he said in his 2024 forecast published Dec. 22.
The Canadian dollar climbed 5 percent from the start of November to the end of the year, while crude prices fell.
