By Hilary Schmidt, International Banker
With all the turbulence affecting markets during 2023—economic downturns, persistent inflation, heightened geopolitical risks and accelerated climate warnings being among the most impactful—it is no surprise that gold enjoyed one of its most bullish years in recent times. Long considered a safe-haven asset during times of heightened uncertainty and volatility, the yellow metal saw pronounced demand throughout much of the year, sending its troy-ounce price skyrocketing to its highest annual close on record. And with key market risks persisting in 2024, this rally appears far from over.
Indeed, gold rose by a hefty 15 percent across 2023 to hit a final trading-day record of $2,078 per ounce (/oz) on December 28, positioning it near the top of the year’s best-performing assets. Earlier in the month, moreover, the bullion’s price jumped to an all-time intra-day high of $2,135 (on December 4), further underscoring the precious metal’s pronounced bullishness in recent weeks, which many believe will continue throughout much of 2024.
Many important factors explain this strong performance, not least the buoyant demand from central banks across much of the world, particularly those based in emerging markets (EM). Indeed, the World Gold Council (WGC) calculated that central banks’ demand contributed approximately 15 percent to gold’s annual performance. According to the Council’s estimate for the third quarter, central banks collectively bought 337 tons of gold during the July-September period, the second-highest total for any third quarter (Q3) on record. The Q3 buying was a welcome addition to the record-breaking total snapped up during the first half of 2023, leaving net purchases standing at 800 tons for the first nine months of the year.
Much of this buoyant demand has primarily emanated from EM institutions, with purchasing habits that have defied analyst expectations over the last few years. China led global central banks’ buying throughout much of last year, along with other EM central banks, such as Turkey’s, India’s, Iraq’s and the Philippines’. “The People’s Bank of China (PBoC) regained the title of the largest buyer globally, increasing its gold reserves by 78t during the quarter,” the WGC observed in late October. “Since the start of the year, the PBoC has increased its gold holdings by 181t to 2,192t (equivalent to 4 percent of total reserves).”
What’s more, EM central banks’ insatiable appetite for gold appears to be driven by de-dollarisation—that is, concerted reductions in risk exposures to the US dollar—with fears over potential asset seizures becoming more palpable after the confiscation of Russia’s foreign-exchange reserves following the outbreak of war in Ukraine in February 2022. According to a report by Sprott Asset Management published in December, the seizure triggered a wave of buying by central banks, signalling a “strong desire to diversify away from the US dollar and US dollar assets”.
Indeed, central banks’ gold purchases have perhaps been more deeply intertwined with the geopolitical landscape than during any other recent year. “Central banks are largely to thank for the outperformance, but elevated geopolitical risks likely created investor reticence to give up gold as well as being a key driver of central bank demand,” the WGC noted in its “Gold Market Commentary” for 2023. The industry body also cited the banking crisis and the war in Gaza as the year’s two significant event risks in its “Gold Outlook 2024”, estimating that geopolitics added 3 to 6 percent to gold’s performance. “And in a year with major elections taking place globally, including in the US, the EU, India, and Taiwan, investors’ need for portfolio hedges will likely be higher than normal.”
But while bullish sentiment prevails for gold in 2024, it should also be observed that last year saw significant net outflows from gold exchange-traded funds (ETFs) across most of the world, thus marking the third consecutive year of negative annual net ETF flows. The WGC recorded a total contraction of some $15 billion, which it largely attributed to Europe and North America.
“European combined outflows in 2023 amounted to $11 billion, the worst year since 2013 ($13 billion),” the WGC confirmed in its “Gold ETF Flows” 2023 review published on January 9. It also noted that while European inflows were largely observed in March due to systemic fears caused by the escalating banking-sector crisis and “alluring local gold price performances” around the same time, they were comfortably outmatched across most of the remainder of the year by outflows that were driven by the region’s “rocketing interest rates, the hawkish stance of local central banks, strong currencies and rising living costs, which, among other factors, may have led to profit taking”.
North American ETFs shed an additional $4 billion, with the WGC explaining the outflows by highlighting gold-price weakness and increasingly attractive alternatives, such as higher Treasury yields and a stronger dollar. Asia, meanwhile, was the only region to experience net inflows in 2023, albeit at a modest $1 billion, with China, Japan and India reported to be the biggest contributors. “Global geopolitical tensions, local economic uncertainties as well as the eye-catching performances of gold in different currencies fuelled positive gold ETF demand in these markets during the year.”
Still, the consensus among leading analysts for gold’s 2024 performance remains firmly to the upside, with strong buying by central banks set to persist, supporting prices. “Even if 2024 does not reach the same highs as the previous two years, we anticipate that any above-trend buying (i.e., more than 450–500t) should provide an extra boost,” the WGC added in its “Gold Outlook 2024”.
Much will ultimately depend on how the global economy responds to the contractionary monetary policies being maintained by central banks, invariably through their prevailing higher-for-longer regimes. Should more recessions rear their ugly heads than expected, the decision to retain significant gold in a portfolio becomes increasingly justified. But should major economies such as the US successfully effectuate the likelier “soft landing” option, much will depend on how substantially economic growth is trimmed over the coming quarters whilst remaining positive. The subsequent rate cuts may also induce dollar weakness, which should support demand from global investors as their dollar-denominated gold purchases become more affordable in their respective local currencies.
That said, the opportunity costs of remaining in gold under a soft-landing scenario may become too expensive, prompting investors to shift into bonds and riskier assets. “Consensus earnings expectations appear optimistic, and high interest rates would keep bonds attractive,” according to the WGC. “This is consistent with historical evidence, with both bonds and stocks performing well in the two previous soft landings. Gold, however, has not fared as well—increasing slightly in one and decreasing in the other.”
Nonetheless, analysts are largely united at this stage that the gold-price rally remains unfinished and that further upside could still be captured over the coming months. “Following on from a surprisingly robust performance in 2023 we see further price gains in 2024, driven by a trifecta of momentum chasing hedge funds, central banks continuing to buy physical gold at a firm pace, and not least renewed demand from ETF investors,” Saxo Bank’s Ole Hansen told Reuters on December 29.
Despite observing an unusual weakening of the inverse correlation between US real inflation-adjusted bond yields and gold prices that delivered less upside from the pronounced yield decline in late 2023 than in previous years, Morgan Stanley also predicted geopolitical risks would play key supportive roles for gold prices ahead of likely interest-rate cuts that should send yields lower. The US bank recently noted that despite this weakness, an additional 100-basis-point (bp) drop in real yields would drive gold prices a further 5 percent higher. “If gold’s safe haven premium holds, the risk-reward is probably more skewed to the upside,” the US bank recently stated. “Our economists expect four Fed cuts this year, starting in June, and 200 bp in 2025. Looking back to 1990, gold has been on average 6 percent higher 30 days after the first rate cut.”
Another clear indicator of the higher prices expected by the market is the strong net long positioning held by gold traders. As disclosed by the WGC, net long positioning on COMEX reached 677 tons during the final week of 2023, 3 percent higher month-on-month and a hefty 42 percent more than the 476 tons registered at the end of 2022. “Money manager net longs saw similar strength, reaching 421 tons by the end of 2023 and doubling year-on-year,” the Council added. “These changes reflect investors’ improved expectations of the gold price amid shifting macro drivers such as lowering Treasury yields and the dollar.”