Gold has been one of the most treasured and sought-after commodities throughout history – whether as a show of wealth, or a bartering tool. Early on, it was used to trade for goods and services, later being made into coins. Then, it was used to back many of the world’s currencies in what was known as the ‘gold standard’.
That system was officially abandoned when President Nixon cut ties between gold and the US Dollar in 1971. Nevertheless, to many people, gold has remained a valuable and in-demand precious metal.
Gold tends to behave differently than traditional assets like stocks and bonds. A common perception is that it’s a ‘safe-haven’ asset. In reality though, no true ‘safe haven’ exists. Valuations can dramatically fluctuate, and every investment comes with some level of risk.
Firstly, there’s its cultural significance across Asia. India and China particularly, jewellery makes up roughly half of the annual gold demand, with technological uses sitting at about 8%. In these sectors, demand tends to be stable. Central banks and investments account for the remaining demand. The difference, is that for the latter two sectors, needs may fluctuate from year to year and are often driven by uncertainty and fear.
Source: Bloomberg, to the end of 2022
2022 saw a record 1,135 tonnes of gold bought by central banks, almost a quarter of the total demand for the metal. This was particularly high in emerging market regions, where banks sought to diversify their reserves and help manage geopolitical risks.
Today, gold still plays an important part in some investors’ portfolios, for a variety of reasons. From central banks wanting to diversify their reserves to individuals wanting physical assets that may retain value over time.
Over the last year or so, we’ve seen how the gold price has been impacted by certain economic conditions with geopolitical turmoil, high inflation, central bank purchases (of gold) and falling cryptocurrencies.
For example, when Russia first invaded Ukraine in February 2022, some investors looked to mitigate risk with perceived ‘safe havens’ like gold, which meant its price went up.
With tensions again bubbling between major global powers and economic threats persisting, gold could well play a key role in 2023.
Gold has some unique supply and demand factors that mean it often performs well when equities suffer sharp falls. In a balanced portfolio, gold can provide useful diversification benefits. Historically, it has maintained a low correlation with most major asset classes.
Gold is often more sought-after when conditions are uncertain. The effects of the recent economic, geopolitical, and social crises on financial markets worldwide, has driven many investors to search for relative “safe havens” such as gold.
Gold could be useful as an inflation hedge when inflation comes as a “shock” due to external factors, when prices escalate faster than expected or when central bank measures are ineffective.
Gold has typically done well in times of triumph and turbulence and already this year, it’s been one of the better performing assets.
As seen with central banks gold purchases, it can offer good diversification benefits (because it tends to behave differently to other assets), as well helping to manage risk in times of heightened volatility and global uncertainty.
For some, the recent banking crisis (started by the collapse of Silvergate and more notably Silicon Valley Bank), has sparked memories of the global financial crisis. Gold also performed well then, as investors looked to perceived ‘safe havens’ to offset riskier assets. The most recent saga has seen the gold price hit near historic highs.
Gold can also be useful when inflation is high and rising. This is particularly true when high inflation has been caused by an economic slowdown or sudden unexpected crisis, like in today’s environment.
The same was seen in the 70s and 80s, the only other time when inflation was at similar levels to that of today, for similar reasons. It tends to be less desirable when the cause is down to an increase in demand pushing prices higher.
Since the 1970s, whenever inflation has risen above 3%, gold has returned on average, 15% per annum (roughly 9% higher than when it sits below 3%).1
Over these past 50 years, in periods of high inflation, stagflation and recession, gold has produced positive real and nominal growth. It has also made smaller, positive returns when conditions have been more stable.
Gold exchange-traded commodities (ETCs) can be a simple and efficient way for investors to get exposure to the gold price.
Gold ETCs are usually backed by physical gold. This means the ETC will buy gold bars (stored in secure bank vaults) which match the total value of the ETC.
One of the main benefits of an ETC is that the heavy lifting is done by the ETC – sourcing, transporting, storage and insurance of the physical gold bars. It also means that the bars can be bought and sold throughout the day like regular stocks and shares. The unit price is set against a standard benchmark, like the London Bullion Market Association (LBMA) gold price.
Gold rose 4.2% in October, once again setting new records, despite the US Dollar and Treasury bond yields rising in the month, which would typically be headwinds to the yellow metal. The more powerful drivers were geopolitical, especially further escalation in the Middle East conflict and uncertainty ahead of the US Presidential election. Discover insights into the key macro events and what we think you should be keeping your eyes on in the near term.
In this second part of the Gold Report, we explore the various sources of supply and demand to further explain recent movements in the gold price.
1Source: World Gold Council
Value fluctuation: The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested.
Commodities: Instruments providing exposure to commodities are generally considered to be high risk which means there is a greater risk of large fluctuations in the value of the instrument.
Data as at 31.10.2023, unless otherwise stated. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Views and opinions are based on current market conditions and are subject to change.
