In a world of economic uncertainty and geopolitical tensions, gold continues to shine as a beacon of stability for investors. But what does the future hold for this precious metal? Here we consider the current outlook for gold and review the key factors shaping its trajectory and what we are discussing with our investors relative to their asset allocation and portfolio construction.
Despite high interest rates and a strong US dollar – typically considered headwinds for gold – the precious metal has defied expectations in 2024. As of mid-year, gold has surged by an impressive 12%, outpacing most major asset classes. This performance has left many investors wondering: what's driving gold's resilience, and can it continue?
Central Bank Buying: A Pillar of Support
Central banks have been voracious buyers of gold, contributing significantly to its strong performance. The World Gold Council estimates that central bank demand accounted for at least 10% of gold's price increase in 2023 and potentially around 5% so far this year. While there are signs of a potential slowdown in purchases, particularly from China, central bank demand is expected to remain above trend for the remainder of 2024.
The Interest Rate Tightrope
The global economy is in a transitional period, with central banks carefully balancing inflation concerns against signs of cooling labor markets. The European Central Bank's unexpected rate cut in May has fueled speculation about potential rate reductions from other major central banks. Any shift towards lower rates could prove to be a catalyst for gold, potentially attracting Western investment flows that have been notably absent thus far.
Geopolitical Uncertainty: The Wild Card
As illustrated in the chart below, geopolitical risk has been on an upward trend in recent years. Political polarization, armed conflicts, and the erosion of globalization in favor of nationalism continue to fuel economic instability. Gold has historically served as a safe-haven asset during times of geopolitical turmoil, with the World Gold Council noting that gold typically adds 2.5% for every 100-point increase in the Geopolitical Risk Index.
Asian Investment Flows: A Double-Edged Sword
Asian investors, particularly in China and India, have been significant contributors to gold's recent performance. This demand has manifested through increased bar and coin purchases, growing gold ETF holdings, and heightened activity in futures markets. However, this trend also presents a potential risk – if sentiment among Asian investors were to shift, it could lead to profit-taking and exert downward pressure on gold prices.
Consumer Demand: Price Takers or Price Makers?
While often considered "price takers," gold consumers – through jewelry and technology demand – account for over 40% of annual gold demand. The recent sharp upward trend in gold prices has dampened demand in key markets like India and China. However, potential price stability and positive economic growth could reignite consumer interest, particularly in India where gold's role as a store of value is deeply ingrained.
Western Investors: The Missing Piece
Despite gold's strong performance, Western investment flows have been noticeably absent. Gold ETFs have seen net outflows year-to-date, and retail investment demand has been low. This suggests that, unlike previous periods when gold broke record highs, the market is not yet saturated and could see another leg up if Western investors re-enter the market.
Economic Uncertainty and Market Complacency
As shown in the chart below, there's a historical relationship between manufacturing strength and company earnings. Current indicators suggest a potential disconnect, with manufacturing showing signs of slowing while stock markets remain buoyant. This divergence, coupled with volatility near 30-year lows, points to a level of market complacency that could drive investors towards gold as a hedge against potential economic turbulence.
Is the road ahead paved with Gold?
While market consensus suggests a potentially range-bound performance for gold in the second half of 2024, the precious metal's path forward is far from certain. Factors such as interest rate decisions, geopolitical developments, and shifts in investor sentiment could all serve as catalysts for significant price movements.
As investors navigate this complex landscape, it's crucial to consider gold's role within a diversified portfolio. Its unique properties as a store of value, inflation hedge, and safe-haven asset make it a valuable component of a robust investment strategy.
DISCLAIMER
Royce Advisory Pty Ltd (ABN 43 622 402 706) is a Corporate Authorised Representative (CAR) of MB Capital Partners Pty Ltd (AFSL 536053). This article, commentary and discussion is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or particular needs. You should consider whether the information is suitable for your circumstances and where uncertain seek further professional advice.
This communication is based on information from sources believed to be reliable at the time of its preparation (July 2024). However, despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice and neither Royce Advisory or MB Capital Partners is not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.
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