Gold has always been sought after, both for its beauty and its usefulness. It is also often used as a diversification tool, or even as a standalone speculative investment. But its price is often difficult to predict.
As a commodity, the price of gold is not dependent on earnings and revenue growth, as is the case with stocks. Rather, a multitude of external forces, ranging from interest rates to monetary policy to geopolitical events, can cause the price of gold to rise or fall. But it can be difficult for the individual investor to take all of these elements into account themselves.
To help us out, JP Morgan recently released a bold forecast for the price of gold over the next 12-18 months, based on some specific factors. Here’s what the famous investment firm had to say.
JP Morgan’s Gold Prediction
Gold will average $2,012 by the middle of next year and hit $2,175 an ounce by the fourth, according to a research note by Greg Shearer, executive director of global commodity research. quarter 2024. This is an increase from the price of around $1,915 recorded in 2024. August 9, 2023.
If the market price reaches JP Morgan’s forecast of $2,175 by the fourth quarter of 2024, that would represent a gain of about 13.5%.
What are the reasons for this call?
Shearer expects the Federal Reserve to completely reverse its policy of tightening interest rates in the very near future. According to his research note, he expects the Fed to actually start cutting rates by the second quarter of 2024, with falling yields being a “significant driver” for gold.
When interest rates fall, demand for gold generally increases. As investment firm PIMCO explains, when yields are high, gold becomes less attractive because it provides no income. But when interest rates fall, so does the opportunity cost of owning gold.
In other words, owning gold in a low-rate environment requires you to forgo the high income you could earn from other investments in a high-yield environment. Thus, silver tends to flow back into gold, as JP Morgan predicts for the next 12 to 18 months.
Shearer also notes that there is still a risk of recession in the coming months. Recessionary environments tend to dampen interest rates even further, making the case for owning gold. According to Shearer, the deeper a recession, the more gold prices are likely to rise.
In addition to the lower interest rate scenario, JP Morgan also foresees support for gold in the form of institutional demand. According to the firm, central banks will likely continue to buy gold to diversify away from the US dollar – which tends to fall with interest rates – and to protect against increased geopolitical risks.
Should you invest now?
Investing in gold is not for everyone.
For starters, it doesn’t take away any income. Real gold is also quite illiquid, although you can avoid this problem by owning an exchange-traded fund that tracks the price of gold.
Finally, gold prices can be notoriously volatile. Unlike stocks, which have real businesses behind them generating revenue and profits, gold is the ultimate product of supply and demand. Investors generally use it more as a hedge than as an outright investment, and most financial advisors suggest that even the most bullish investors only allocate 10% or less of their portfolio to commodities like gold.
That being said, if JP Morgan’s analysis is to be believed, gold could prove to be a good asset in terms of diversification and appreciation over the next 12 to 18 months. Most economists believe the Fed will actually start cutting interest rates sometime in 2024, and that forms the backdrop to JP Morgan’s argument.
Of course, many economists were also calling for a recession in 2023, and so far the U.S. economy has proven surprisingly resilient. Lowering interest rates could actually help support the economy and keep it out of recession, in which case JP Morgan’s argument for gold may be too optimistic.
Because the future price of gold cannot be determined with certainty, if you are considering investing, consult a financial advisor to determine whether gold fits your investment objectives and risk tolerance. Also consider limiting your investment in gold to no more than 10% of your overall portfolio, even if you are bullish on the precious metal.
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