Paul:
Hello and welcome to this interview focused on gold. My name is Paul Syms and I head up product management for Invesco’s European fixed income and commodity exchange traded products and I’m delighted to be joined today by Kathy Kriskey, our senior commodity strategist who is based in our New York office.
Hi Kathy. It’s good to catch up and I want to talk about what’s going on with gold! When we launched our gold product 15 years ago $1,000 was the big barrier. So far this year, gold has been rallying aggressively and recently broke through $2,400 an ounce. Can you give us a quick recap of how we got here?
Kathy:
Hi Paul. Wow, what an interesting 15 years it’s been for this precious metal! I think it’s important to remember that gold has played an important role in the development of society throughout time, initially used for ceremonial rites, and later as a global currency and store of value.
So, let’s go back even further to 1971, when the US left the Bretton Woods system, which was set up after WWII, fixing exchange rates between gold and the USD. This led to a surge in gold prices going from $40/oz to $660/oz by 1980. It was a time of severe economic uncertainty with stagflation in the US, high inflation, low economic growth and high unemployment. Let’s hope we are not heading back to that situation anytime soon!
After that, gold was stable for 20 years, but in the 2000’s it really started to shine with the impacts of the Global Financial Crisis and the following Great Recession, when investors sought a flight to safety. From 2001 to 2012, gold went from $300/oz to $1,700. These were turbulent times, with the European sovereign debt crisis also supporting gold prices.
Things started to normalize as the US Federal Reserve ceased its quantitative easing and the USD strengthened, bringing gold back down to $1,200 by late 2014.
The covid pandemic of 2020 also impacted the gold market, with its unprecedented disruptions to every part of our lives and economies, ultimately pushing prices higher than $2,000/oz.
Until this recent move up, gold stayed basically in a range of $1,700 – 1,900.
Paul:
Which gets us to where we are now. What are the main drivers today? We’ve seen the increased demand from central banks, do you think they will remain big buyers?
Kathy:
The major driver for gold hitting its historic high is about Emerging Market Central Bank buying in a move to “de-dollarize” their reserves and retail demand for physical bars and coins. The central banks increasing their gold holdings are China, Turkey, India, Poland, Kazakhstan, Singapore, Russia and the Czech Republic. The freezing of Russia’s USD-based reserves after their invasion of Ukraine concerned central banks around the world, and their purchases of bullion doubled, according to the World Gold Council.
On retail demand, Chinese consumers, nervous about their economy, currency and property sector, have ramped up their purchases of physical gold, with March being the highest level seen in seven years. This retail demand isn’t just coming from China, as Costco in the US is now offering gold bars to consumers. Increasing global government debt is also causing investors to look for diversification away from government bonds and currencies. We also have two active wars, which make gold attractive as a perceived safe-haven. These investors are buying both physical gold and exchange traded products which hold physical gold.
Another factor which normally impacts gold prices is interest rates. Although you guys in Europe got your first rate cut recently, those of us on the other side of the pond are still waiting for the start of our easing cycle. The Fed is communicating that we might stay higher for longer on rates and that isn’t great for gold prices. The eventual Fed easing, hopefully by the end of the year, should support prices, but some precious metal investors may stay on the sidelines until that happens.
Paul:
Now the big question is where we go from here. Instead of asking you for your prediction, I’d like to get your views on a couple of scenarios. First, what would you see over the next year as providing a bullish case for the gold price?
Kathy:
While gold prices are already high, relatively, we still haven’t seen interest rates in the US come down, and as we all know, gold doesn’t pay any interest so when other investments like bonds earn less interest, gold looks attractive. And inflation in the US has been sticky, staying above the Fed’s target level of 2%. Investors often use gold as a hedge to inflation. So, if we continue to get support from central bank buying, and we still have some geopolitical risk, when the Fed finally eases, we could see gold higher. Also, concerns around the US and other elections in the world could cause investors to use gold to hedge the uncertainty.
Paul:
OK, and for a bearish case?
Kathy:
What? Bearish gold? No! There are a few things that could happen which could cause gold to move down. The market believes all the central bank buying has provided a floor to the gold price, initially around $1,900, but lately around $2,000 - $2,100. If central banks no longer provide this floor because they pause or cease their purchases, we could see a correction. China recently paused their huge 18 month buying spree, and that caused a correction. But a purchase pause may be natural - they did that in 2016 and came right back into the market and there are other central banks like Turkey that are ramping up their purchases. While we are all hoping for an end to these wars, if that happens gold could lose some of its safe-haven strength. Also, the Fed could decide to put off their easing until mid-2025, which would certainly anger investors in all markets and might also dampen gold demand.
I like to think of gold as a security blanket … when things get really scary, it’s nice to have gold to hold on to. We will see how investors feel about whether or not they need that blanket …
Paul:
Thank you, Kathy, very interesting. While the gold price has rallied in recent months, it does feel like there are plenty of reasons for investors to continue looking to gold to meet certain objectives.
So, thanks again Kathy for providing your insights into the gold market and thank you for joining us today to listen to our thoughts on what’s been driving the gold price over the last 15 years since we launched our gold ETC and the outlook for the months ahead.
Source: Invesco, as at 31 May 2024.
