Inflation 2024 Outlook: Insights for Gold and Silver Investors

Key takeaways

• Inflation is slowing down but still above the Fed’s target
• Interest rates are expected to stay high for extended period
• Risks of stagflation are emerging
• Macro scenario seems supportive of gold and silver prices
• Precious metals to continue to play key role in financial portfolios

Understanding Inflation

Inflation is generally explained as a broad increase in the prices of goods and services. The European Central Bank’s website summarises the concept of inflation by stating that “you can buy less for €1 today than you could yesterday.” In other words, inflation reduces the value of a currency over time, leading to a loss of purchasing power. This impact is particularly significant if the inflation rate is high, affecting everything from groceries to utility costs. Consequences are often substantial. The ECB explains that excessively high inflation “ultimately leads to a slowdown in economic growth.”

What is inflation?

Inflation is a metric that aims to measure (and summarise) the average impact of price changes in a large number of products and services representative of the economy. It is measured over a specific time, such as one month or a year. This number can tell us immediately how prices have grown month over month (MoM) or year over year (YoY).

2024 Inflation Predictions

Inflation will likely continue to lower, but the pace of its decrease will be slower than expected. At the end of 2023, investors were forecasting 6 (or even 7) rate cuts by the Federal Reserve. Now, this expectation has been slashed to just one or—in the best scenario— 2, as suggested by data gathered on the CME FedWatch Tool. And while this happened, gold jumped to new all-time record highs multiple times.

A recent Morningstar report explained that the Personal Consumption Expenditures Price Index (PCE Index) is projected to decline to 2.1% by Q4 2024, averaging 2.3% for the year.

The supply chain has shown signs of recovery, and the escalation in house prices has moderated, though Morningstar notes that these improvements need to be fully captured in the current inflation metrics. 

The report projects that the inflation rate from 2024 to 2028 will likely hover around the Federal Reserve’s target of 2.0%. But will this happen, or is there a risk that US inflation could defy analyst expectations again?

If this happens, markets will probably be shocked because the theory of a soft landing – where the economy slows down but avoids a recession – is priced in as the most likely scenario, even if not everyone agrees. 

A “No landing” impact on gold and silver prices 

The recent Bank of America Fund Manager Survey indicates that a ‘no-landing’ scenario, where the economy maintains strong growth and inflation without entering a recession, has risen dramatically from 7% to 36%. This shift suggests that a growing number of investors anticipate both sustained economic growth and persistent inflation into 2024, with interest rates remaining “higher for longer”, a view frequently emphasised by Federal Reserve chairman Jerome Powell. 

Such conditions could set the stage for further increases in gold and silver prices as investors seek haven assets amid economic uncertainty. Moreover, global inflation forecasts for 2024 are still in the region of 6.0%. This figure is below the peak of 8.7% reached in 2022 but confirms that the decrease in inflation is very slow, representing further positive news for the gold price.

Inflation’s Impact on Investments

Inflation has a significant impact on investment and stock prices. Indeed, some sectors benefit from elevated inflation (for example, banking, with higher operating margins, but also luxury brands, as they are able to transfer the increase in costs to clients). Vice versa, when inflation jumps, other sectors, such as retail consumer or “growth” stocks, generally suffer.

The Role of Gold and Silver

Why do gold and silver matter in times of inflation? Precious metals are key assets in all diversified financial portfolios, offering stability whether the prices of goods and services increase significantly or if inflation is close to zero. Much like insurance protects a home against unforeseen damages, gold and silver act as haven assets, safeguarding wealth when other investments may falter in volatile markets.

Inflation and Gold – Historical Performance

Gold is traditionally perceived as a hedge against inflation, and the long-term data supports this relationship. Analysing bullion performance over the past 50 years, the World Gold Council notes that gold has typically appreciated by about 15% year-on-year when inflation exceeded 3%. Conversely, during times of lower inflation, gold’s average annual return was around 6%. This indicates that gold often outperforms other assets in high-inflation environments.

However, the relationship between gold prices and inflation isn’t always straightforward. For instance, between 2007 and 2009, inflation dropped while gold continued its rally. Similarly, the sharp decline in gold prices registered in 2013, which saw values fall by nearly 30%, cannot be solely explained by low inflation but seems definitely more linked to the Federal Reserve’s monetary policy.

Gold and the Risk of Stagflation

Gold and silver typically excel during periods of high inflation, but their performance is particularly robust during “stagflation” —a troubling mix of rising inflation, increasing unemployment, and stagnant demand. 

This combination often triggers economic slowdowns and market volatility, further enhancing the appeal of precious metals as haven investments. While the labour market remains robust, inflation levels exceed those deemed manageable by the Federal Reserve, which continues to struggle with its containment. This scenario raises the spectre of Stagflation, driven by potential disruptors such as international conflicts, trade barriers, and supply chain issues.

In the past (particularly in the 1970s), bullion prices jumped massively during stagflation, confirming its role as a haven in financial portfolios. Stagflation appears to be a remote scenario, but investors should be ready, and silver and gold could be solid insurance in case of market uncertainty and financial turmoil. 

Given this uncertainty, investors would be prudent to include gold and silver in their investment strategies for 2024 as insurance against potential market disruptions and economic instability.