Helena Mboti
The global economic landscape is characterised by heightened geopolitical tensions, potential for conflict escalation, and ongoing environmental concerns. Moreover, over 60 countries are slated for elections, adding to the level of global uncertainty. This article explores how these factors are shaping the demand for gold, a physical asset and store of value throughout macro-financial stresses in business cycles, known for its resilience and safe-haven qualities.
The price of gold exhibited a steady upward trend over the past four years. In 2020, the average price sat at US$1 773.73 per ounce. Although there was a slight dip in 2021, the average price remained high at US$1 798.89 per ounce, representing a 1.4% year-on-year (y/y) increase from 2020. This upward trend continued in 2022 with prices reaching an average of US$1 801.87 per ounce, reflecting a modest 0.23% y/y increase. The year 2023 witnessed a significant surge, with the average price rising to a record high of US$1 940.54 per ounce, marking an 8% y/y increase, compared to 2022.
Furthermore, prices continued to climb throughout the year, ending at a record-breaking US$2 078.4 per ounce, and delivering a remarkable 15% return on investment for the year. Year-to-date, the commodity has continued on an upward trend, with spot price averaging above US$2 300.00 per ounce for the month of June.
The decarbonisation of the global energy basket and supply chain disruptions caused by increased geopolitical risks as well as accelerating geo-economic fragmentation are likely to exert upward pressure on commodity prices. This, combined with increased government spending precipitated by military activism due to rising geopolitical tensions across the globe, is expected to keep inflation elevated, compared to the previous decade. Consequently, central banks may be forced to keep nominal interest rates comparatively elevated for longer, negatively impacting economic activity.
This confluence of higher inflation and interest rates could significantly weigh on the growth momentum of some developed economies.
Escalating geopolitical tensions, where we estimate the probability of conflict estimated between 30-40%, are driving a significant flight to safety among investors. This risk aversion is manifested in a major reallocation of assets away from equities and towards fixed income instruments, as well as physical stores of wealth such as gold. Additionally, wider credit spreads, indicating a preference for safer, albeit lower-yielding, fixed income options are signaling a flight to safety. In this environment of uncertainty, gold emerges as a valuable asset. Unlike traditional investments, it has no inherent counter-party risk, and is considered a reliable store of value. Gold’s diverse demand comes from various sectors, including jewellery, technology and central bank reserves. As a financial asset, gold exhibits an inverse longer-run correlation with broader risk assets, contributing to a counter-cyclical nature and robustness amidst macro-financial risks and economic fluctuations.
Central banks have been pivotal players in the recent surge of gold demand. Witnessing record purchases in 2022 and 2023, with 2024 continuing the trend, it’s evident that central banks, particularly those across emerging markets, view an asset shift into gold and away from US Treasury holdings as a critical component of their reserve diversification strategy, considering growing US debt sustainability concerns.
Moreover, despite a slight decline in 2023, industrial gold demand remains resilient in the technology sector, particularly in electronics. This demand is likely to rebound in 2024, as consumer electronics market dynamics garner momentum. Additionally, the cultural and emotional value of gold in jewellery markets like India and China continues to anchor physical gold demand.
The current gold rush signifies a return to fundamental principles in a macroeconomic environment rife with uncertainty. As investors seek safety due to geopolitical tensions and the prospect of higher inflation, fixed income options become increasingly attractive from an asset allocative perspective. Heightened uncertainty also means physical assets ought to also receive higher allocations in balanced global portfolios. In this regard, gold’s inherent value as a tangible asset and hedge against inflation becomes paramount. This enduring appeal is likely to persist in the face of ongoing global challenges.
*Helena Mboti is an economist at FNB Namibia.