The price of gold tends to be inversely related to changes in US real interest rates: a relationship that has always worked since 2006. Gold, in fact, is a real asset that does not generate returns and is not convenient for investors as positive real rates increase. Furthermore, if the US dollar strengthens, commodities (including gold) denominated in US currency are more expensive for non-American investors (most of whom are gold investors). Finally, the yellow metal is often perceived as a safe haven asset purchased especially in phases of market stress.
A PUSH FROM DEMAND FROM CENTRAL BANKS
“This year, although the volatility of US stocks has returned to lows (based on the VIX index which measures the expectation of volatility of the US stock market) and credit spreads have narrowed significantly, the price of gold has increased more than 17% since January: in a period in which real interest rates were increasing, the US dollar was strengthening and risky assets continued to rise,” he underlines Nadège DufosséGlobal Head of Multi-Asset at Candriamwhich then explains the exceptional performance of gold: demand from central banks.
CHINA HAS INCREASED ITS GOLD RESERVES
Demand from banks has doubled since 2022, passing from 11% in 2021 to 23% in 2023, continuing into the first quarter of this year. China, in particular, despite being the largest gold producer in the world (with 10% of mining production) is at the same time the world’s largest importer (20% of gold demand). The PBOC, China’s central bank, increased its gold reserves in 2022-2023, while Chinese consumers appear to have channeled part of their savings into purchases of the precious metal.
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PANDEMIC AND WAR IN UKRAINE
“If the reserves of all central banks in emerging countries reached a minimum of 10% in gold, global gold demand would grow by more than 75% – Dufossé says – According to a survey conducted in 2023, 23% of central banks intended to increase their gold reserves in the next 12 months.” It is since the outbreak of the pandemic and the beginning of the war in Ukraine that the need to diversify central bank reserves has strengthened. “Probably there is a perception of greater financial risklinked on the one hand to the widening of the American deficit and on the other to the United States’ sanctions against Russia with the freezing of 300 billion in dollar reserves”, explains the Candriam manager.
MORE FAVORABLE MACRO CONTEXT
Looking ahead, while production is expected to continue to hover around 3,000 tons per year, the macroeconomic context should be slightly more favorable. “Real interest rates are expected to be stable or even slightly decreasing with the economic slowdown and the first rate cuts by the Fed, which should support the price of gold – he further explains Nadège Dufossé – If then, in the opposite scenario, there was a return of inflation, the repercussions would be favorable to gold which, as a real asset, protects against excessive consumer prices.”
GEOPOLITICAL RISKS AND US DEFICIT
On the demand side, the geopolitical risks that are still present and the US deficit that will not be reduced will continue to support purchases by central banks, particularly in emerging countries. “The visibility of the short-term dynamics remains low, however in the medium and long term, upward trends in gold demand clearly appear more positive”, points out the Global Head of Multi-Asset of Candriam.
IMPROVES THE RISK / RETURN PROFILE
In a multi-asset portfolio, Candriam simulations make gold’s diversification function interesting presents a poor correlation with the performance of stocks and bonds. Without neglecting the fact that the yellow metal reacts positively to market tensions: a structural exposure to gold of 3% to 5% to gold, together with other alternative assets, tends to improve the risk/return profile of the portfolio.
