John Reid, chief market strategist at the World Gold Council, said gold demand will continue to be driven by emerging markets, particularly China, India and Turkey.
“Almost three-quarters of consumer demand for gold over the last decade has come from emerging markets,” Reid said at the Nomura Investment Forum Asia 2024 in Singapore on June 4. That’s a change from previous decades, when two-thirds of gold demand came from Europe, North America and Japan. “Emerging market buyers are taking control of the gold market from Western countries.”
According to Reid, the surge in gold, which has reached an all-time high in any currency, is due to central banks buying record amounts of gold and investors increasing their asset allocation to gold. Precious metals have also evolved into one of the most financialized commodities, with 38% of average annual net demand coming from investments and 18% of gold purchased by central banks and kept as part of reserves, according to data from the World Gold Council. The remaining 45% is used in jewelry and technology devices. Gold is used in small amounts in the technology sector, where demand is increasing. However, as semiconductor chips get smaller in size, less gold will be used in each, and overall demand for gold from the technology sector is predicted to remain unchanged.
Emerging market buyers have continued to purchase gold, signaling their acceptance of higher prices, currently at around US$2,360 per troy ounce. Investments in gold bars and coins have been particularly popular among buyers from China, India and Turkey. Asian gold ETFs have also continued to see inflows, while European and North American funds have seen outflows.
Reid said the expected cut in U.S. interest rates should be positive for gold demand, as Western investors may return to the market after the cut. The current political uncertainty in the U.S. is also encouraging investors to consider adding gold to their portfolios.
Meanwhile, gold prices also continue to break away from their historical correlation. Wall Street had been expecting gold prices to fall from 2021 onwards as the real yield on the 10-year US Treasury note rose significantly, but gold has broken away from this relationship and has risen significantly, Reid said. Similarly, the US dollar has been strong for the past few years, which would normally signal weakness in gold prices, but that has not happened. When a recession hits, people are expected to buy gold as confidence in the currency decreases. Another relationship that has worked well for a while, according to Reid, was the expectation for the end of the Federal Funds rate at the end of 2024. People have tempered their expectations for a rate cut this year, but that hasn’t stopped gold from breaking away from this relationship.
Reid said central bank gold purchases are set to double from the historical average to more than 1,000 tonnes in 2022 and 2023, along with the growing importance of all-round demand from emerging markets, which is what has pushed the precious metal out of these historical price relationships.
Emerging market central banks have been buying gold every year since the Global Financial Crisis. The shift to gold is being driven by several factors, including sanctions against Russia, inflation becoming a bigger problem over the next decade, and the move away from the dollar. Even at these purchasing rates, it will take years, even decades, for emerging market central bank gold reserves to reach the levels of Western economies.
“Gold has become a very attractive asset for Chinese buyers who have experienced an economic downturn, a bearish stock market and a sluggish real estate market. Meanwhile, in India, where the economy is growing rapidly, a cultural affinity for the metal is boosting demand. Demand for gold is robust in Turkey, where inflation is high, real interest rates are negative and political uncertainty prevails,” Reid said.
“Gold supplies are likely to plateau or even decline over the next few years due to production bottlenecks. Mines are becoming increasingly difficult to find, build and finance, and obtaining the environmental permits needed to operate is especially challenging. As a result, recycling gold from old jewelry is seeing a resurgence,” Reid said.
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