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What's next for gold?

This is an edited extract of an interview between John Reade, Senior Market Strategist for Europe and Asia at the World Gold Council, and Firstlinks’ James Gruber, on October 29, 2024.

James Gruber: Gold is a hot topic - what's behind the rise in your view?

John Reade: I suppose it depends on the timeframe. If we take the last couple of years, I think that gold has put in a surprisingly strong performance despite a strong US dollar and higher US interest rates. And I think the reason for that unexpectedly strong performance has been connected to two things. First of all, there's been greatly increased central bank purchases, which doubled around 2022, and the second thing has been strong buying of all types, from emerging market sources, whether that's the central banks, whether it's Chinese retail investment, whether it's Chinese jewelry demand, whether it's Indian jewelry demand, whether it's investment demand out of Turkey and other countries too. The strength of emerging market demand, combined with a strong central bank demand, has really supported gold during times you'd have expected it to be under pressure.

And then turning to this year, we've seen leveraged investors, particularly on the COMEX futures market in the US, together with the beginnings of a return of Western investment demand over the last four or five months really add to the strength we've seen in gold.

Gruber: Central banks and emerging market demand, can we break that down - which central banks and which emerging markets are buying gold?

Reade: On the central bank side, we've seen buying every year since the GFC from central banks, and that's been predominantly emerging markets. The only developed market central bank that's bought gold in any quantity has been Singapore, but they've all generally been buying for the same reasons post GFC, and that's the fact that they've amassed lots of foreign currency reserves and didn't have much in the way of gold, and the GFC and other events have demonstrated to them that having gold in their portfolio made a lot of sense.

Gruber: With Chinese demand for gold, is that the outflow from money in property and stock markets to gold?

Reade: That’s part of it. Pressure on the currency too has left a country where the savings rate is really high and fewer attractive alternatives to place those savings. So, gold's benefited there. It probably also benefited from the announcements from the People's Bank of China that they were adding gold to their reserves, almost sending a signal to the Chinese population that this was a good thing to buy. Almost state approved. So that may have been a contributing factor as well.

But, generally speaking, the emerging market buying we've seen has been for domestic, financial and political reasons. We've touched upon China.

In the case of Turkey, last year was a good example. High inflation, a manipulated currency ahead of the presidential election, Turkish citizens expecting the currency to fall sharply after the election was concluded, which indeed happened, led to buying up hard assets across the board - fridges, cars, dollars, and especially gold.

I think that's one of the reasons why the gold market was able to shrug off these traditional developed market drivers of the US dollar and interest rates, because the strength and enthusiasm of the buying of gold from emerging markets was so marked.

Gruber: The US dollar has been ripping higher and gold has still managed to perform well. How do you join those dots?

Reade: My view on it is fairly simple. The US economy is still a place where people want to put their money. Look at the returns that we've seen in asset markets in America.

I don't think that attitudes towards the economy will change much in the short term, irrespective, of who leads the country, but the prospects of a victor that can spend even more freely than is being spent at the moment probably runs the risk of higher inflation, probably runs the risk of tighter monetary policy. As a consequence, probably runs the risk of the US dollar staying in favor. And I think that may be what people are signaling at the moment.

Obviously there are differences in stated economic policy from the two candidates, but neither of them look as if they're about to get the deficit under control, and that's certainly one of the factors we're hearing from high net worth investors about why they're looking more towards gold than they have done perhaps in the last few years, is because of renewed concern about the outlook for debt and taxes.

Gruber: I'm always surprised about how little institutions here invest in gold. Have you ever seen a bit of a switch or is that yet to happen?

Reade: We've had some successes in the work that we've done trying to engage institutional investors on gold.

I've been down to Australia four or five times since COVID and have spoken at many conferences and engaged with many super funds, and I'd say that the pattern is very similar. In general, gold is still viewed by institutions here as an asset that's too far out of their recommended allocation.  

Gruber: Gold miners haven't performed at the same level as physical gold, and that's been a trend ever since the GFC. Is it a hangover from that period, or are other factors at play?

Reade: I think there's some residual wariness towards the capital allocation decisions that were made during the last gold price boom, even though gold mining companies seem to and certainly say that they have changed the way that they're managing their operations.

But the other factor has been costs. Inflation is something that doesn't just affect consumers. It's been affecting gold mining companies too, and although there are signs that gold mine inflation, cost inflation, has fallen somewhat, it's a concern to investors.

The other thing as well is that emerging market investors and emerging market central banks have been the dominant force in [physical] gold in the last couple of years, but they're not necessarily natural buyers of gold shares. If Western investors return to gold, then perhaps gold equities will get renewed interest too.

Gruber: What are the keys for gold over the next 12 to 18 months?

Reade: Well, I hinted at it in the previous answer, which is that we need to see Western investors join the party. There are some signs that the emerging market buying we've seen over the last couple of years is slowing. For gold to continue to do well from here, we're going to need to see Western investors returning to gold.

 

James Gruber is editor of Firstlinks and Morningstar.

John Reade is a Market Strategist, Europe and Asia at World Gold Council, a sponsor of Firstlinks. This article is for general informational and educational purposes only and does not amount to direct or indirect investment advice or assistance. You should consult with your professional advisers regarding any such product or service, take into account your individual financial needs and circumstances and carefully consider the risks associated with any investment decision.

For more articles and papers from World Gold Council, please click here.

 

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