By: Sean Curry
Gold has long been a core anchor to alternative investment allocations. However its recent price behaviour runs contrary to traditional narratives, leading investors to ask what is driving the asset’s recent strength and what is the outlook for future pricing trends.
Given that it is a non-yielding asset, Gold would usually be considered vulnerable to competition from the rise in government bond yields we have seen recently. In addition, a strong dollar is usually perceived to be Gold negative.
Despite these headwinds, Gold has reached a nominal high of nearly $2400 in Q1 2024. There are several reasons behind this.
Safe Haven demand
Geopolitical uncertainty is usually associated with strong demand for Gold. News headlines in 2024 have been dominated by tensions in the Middle East, political polarisation and the prospects of a fraught election cycle in the US. They are all factors that may have been contributing to the safe haven demand for Gold. Having said that, this has yet to show up in Western demand for Gold ETFs which have remained negative through this rally.
Central Banks Gold Buying Momentum continues into 2024
Data as at March 24. Source Metals Focus, Refinitiv, World Gold Council
The role of foreign reserves
Central banks have been substantial buyers of Gold in recent years. This trend has continued, with World Gold Council data showing 290 tonnes added to official Holdings in Q1 of this year. The acceleration of this demand over the last two years is widely attributed to a growing desire to diversify away from Western institutions and the US dollar – so-called ‘de-dollarisation’, with Russia’s Central Bank a big buyer.
Supporting this thesis is the declined proportion of foreign ownership of US Treasuries. Despite the recent accumulation, Gold is still just 4.3%* as a proportion of China’s total reserves, well below the likes of the US, Germany and France which have around 70%, indicating there could still be a very long demand runway.
Broadening Chinese Demand
Chinese Gold Trading Activity Explodes – SHFE Trading Volume (mn)
Source: Bloomberg, May 2024
Retail flows from Chinese investors picked up in Q1. With a background of weak domestic property and equity markets in recent years, there is evidence that Chinese households are turning to Gold as an alternative investment. There were additional signs of a speculative frenzy in Q1 with the local Gold price moving to a historic premium and trading volumes exploding on the Shanghai Futures Exchange (SHFE).
* Source: Statista. Percentage of gold reserves in selected central bank holdings in 2023.
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