Inflation and Gold: Looking Back into 2023 and Ahead to 2024

Despite persistent forecasts for a U.S. recession, 2023 may well be remembered as the year a recession never happened. Yet, the jury is still out on whether or not the Federal Reserve can engineer a so-called “soft landing” in 2024 – or bring down inflation to the central bank’s 2% target without triggering a recession. Throughout it all in 2023, gold served investors well as a safe-haven and a hedge against inflation as we saw the precious metal push to a new all-time record high above the $2,100 an ounce level.

A quick look back: how inflation started

During the Covid pandemic, a mix of economic factors including global supply chain pressures, labor and material shortages and loose monetary and fiscal policy conspired to drive inflation sharply higher.

Starting in March 2022, the Fed aggressively raised interest rates from 0.25-0.50% to its current 5.25-5.50% level in an effort to battle inflation down. While it took time, the impact from higher interest rates have helped slow down inflation.

Inflation: by the numbers

While many Americans may still feel that prices of goods and services are still too high, the pace of inflation has slowed during 2023.

Since January, the Consumer Price Index (CPI) fell from an annualized 6.4% rate to 3.1% in November. As inflation fell, gold increased in value. While inflation is one of the drivers for gold, other factors also support the precious metal including its role as a global safe-haven asset during times of war and military strife. The breakout of the Israel-Hamas war triggered fresh buying into gold in the fourth quarter of 2024.

While progress has been made on inflation, it is too early for the Fed to declare victory. Inflation still stands above the Fed’s 2% target. Many economists warn the “last mile” to the 2% target rate may be the hardest to achieve.

For now, the higher interest rates haven’t triggered an economic recession but the U.S. economy isn’t out of the woods yet. A number of Wall Street firms, including bond giant PIMCO, Deutsche Bank, Vanguard, PNC and LPL Financial, all expect a mild recession to emerge in the U.S. in 2024. Many consumers are shouldering high debt burdens as American credit card debt recently hit a new all-time record high which will weigh down consumer spending in the New Year.

Inflation remains, but Fed may be forced to cut rates

As we roll into 2024, gold can benefit from both falling interest rates and inflation that remains too high.

While Americans will continue to keep an eye on everyday prices, slowing economic growth may force the Fed to cut interest rates—even if inflation still remains above its 2% target rate. Indeed, at its December meeting, the central bank already revealed that it has penciled in three rate cuts in 2024.

What does this mean for gold? Higher interest rates typically compete with gold, which pays no interest. So, when rates fall, gold generally climbs. The falling interest rate environment is a positive driver for gold, while above target inflation creates a floor under the precious metal.

Gold has proven value to investors in all parts of the business and investing cycle and, throughout 2023, acted as a strong ballast to diversified portfolios. As we head into a New Year, have you considered if you own enough?

Want to read more? Subscribe to the Blanchard Newsletter and get our tales from the vault, our favorite stories from around the world, and the latest tangible assets news delivered to your inbox weekly.