Central banks and emerging markets push gold sky-high, says World Gold Council
Emerging market buyers have wrested control of the gold market from the West, said Mr. John Reade, Chief Market Strategist, World Gold Council.
- Sky-high gold prices have been driven by central banks buying record quantities of gold and investors increasing their asset allocations into the precious metal.
- Investment into gold bars and coins have become particularly popular among Chinese, Indian, and Turkish buyers.
- In the years to come, gold supply may plateau or potentially decline due to a bottleneck in mining.
Demand for gold will continue to be driven by emerging markets, particularly China, India and Turkey, said Mr. John Reade, Chief Market Strategist, World Gold Council.
“Nearly three-quarters of consumer demand for gold over the last ten years has come from emerging markets,” Reade said, speaking at Nomura Investment Forum Asia 2024 in Singapore on June 4. This has shifted away from the previous decades when two-thirds of gold demand originated from Europe, North America and Japan. “Emerging market buyers have wrested control of the gold market from the West.”
The sky-high price of gold, which has reached all-time highs in every currency, has been driven by central banks buying record quantities of the commodity and investors increasing their asset allocations into it, said Reade. The precious metal has also evolved to become one of the most financialized commodities, with 38% of average annual net demand coming from investment and 18% of gold being bought and kept by central banks as part of their reserves, according to World Gold Council data. Another 45% is used in jewelry and technological devices. Gold is used in small quantities in tech and there has been an increase in demand. However, as semiconductor chips become smaller in size, less gold will be used in each, with the overall demand for gold from tech estimated to stay the same.
Emerging market buyers have continued buying gold, signaling they have accepted high gold prices, which stand at around US $2,360 a troy ounce now. Investment into gold bars and coins have become particularly popular among Chinese, Indian, and Turkish buyers. Asian gold ETFs continue to gain inflows too, while European and North American funds have seen outflows.
Expected US interest rate cuts should be good for gold demand, Reade said. Western investors could return to the market following cuts. Current political uncertainty in the US has also made investors consider adding gold to their portfolios.
Meanwhile, the price of gold also continues to break away from historical correlations. With a massive increase in real 10-year US treasury yields, Wall Street has been expecting gold prices to fall since 2021, and yet gold has broken away from this relationship and traded materially higher, said Reade. Similarly, the US dollar has been strong over the past few years and that would normally point to gold price weakness, but that hasn’t happened. When a recession hits, it is expected that people buy gold as confidence in their currency wanes. Another relationship that worked well for a while was the expectation of where the Fed funds rate would end up at the end of 2024, said Reade. Even as people have been reigning in their expectations for rate cuts this year, it hasn’t stopped gold from breaking away from this relationship.
It’s the doubling of gold purchases by central banks from their historical averages to over 1,000 tons in 2022 and 2023 and the growing importance of all categories of demand from emerging markets that has pushed the price of the precious metal out of these historical pricing relationships, said Reade.
Emerging market central banks have bought gold every year following the global financial crisis. Their pivot towards gold is driven by several factors including sanctions against Russia, inflation becoming a bigger problem in the next decade, and the move towards dedollarization. Even at these rates of purchases, it will take years if not decades for emerging market central bank gold reserves to reach the level of Western economies.
Gold has become a very attractive asset for Chinese buyers who have seen an economic slump, a bear market in equities and a weak property market. In India, at the other end of the spectrum, where the economy has been growing rapidly, the cultural affinity towards gold has increased demand. In Turkey, where inflation is high, real interest rates are negative, and there’s political uncertainty, gold demand has been strong, said Reade.
In the years to come, gold supply may plateau or even potentially decline due to bottlenecks in production. It’s becoming harder to find, build and finance mines, and particularly difficult to obtain the environmental permits to operate. As a result, recycling gold from old jewelry is making a comeback, said Reade.
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