Reshaping the global gold market
Sat May 25 2024
As much as Western investors want to ignore the gold market, there is no denying that we are seeing a generational shift in the marketplace.
Investment demand is being replaced by central bank purchases as one of the most significant factors driving prices. At the same time, market influence is rushing from the West to the East as Asian buyers, specifically Chinese retail investors, have an insatiable appetite for gold.
This shifting dynamic in gold was revealed in Incrementum AG’s annual comprehensive "In Gold We Trust" report. In one of its findings, the report highlights the end of the Great Moderation—a period characterized by low inflation—and the onset of persistent inflation volatility. This new economic environment strengthens the case for gold as a hedge against inflation and economic instability.
The theme of this year’s IGWT report was embracing a new playbook, which is fairly apt in this environment. Central banks and Emerging Market economies are embracing new strategies that include gold as an important monetary asset; however, Western investors continue to read from the old playbook as they focus on monetary policy and opportunity costs of holding gold.
As a nonyielding asset, holding gold while interest rates remain in restrictive territory can be expensive. While this remains a factor for gold, it is not the dominating theme anymore.
Although central banks have been buying gold at an unprecedented pace, they are not alone. Analysts have noted that gold is becoming a globally important monetary metal.
In an interview with Kitco News, Steve Land, Lead Portfolio Manager of Franklin Templeton’s Franklin Gold and Precious Metals Fund, said that the rise in over-the-counter activity in the gold market could be a sign that nations are using the precious metal to settle international trade.
Land is not alone. Steve Forbes, Chairman, and Editor-in-Chief of Forbes Media, suggested in a recent commentary that the world is inching toward a new gold standard. Forbes notes that despite widespread skepticism, the historical gold standard provided economic stability and growth.
Gold’s growing allure makes sense when you look at the size of government debt worldwide. Forbes noted that total global debt is more than $300 trillion, three times the global GDP.
Land said that sovereign gold demand will continue to rise as nations become more insular.
While Western investors are still not interested in gold, this segment of the market shows some recognition that marketplace dynamics have changed. Retail investors may not be buying gold, but they at least aren’t selling it on masse anymore.
We could still see investors following the old playbook, and the Fed’s hesitancy to signal rate cuts this year will create some short-term volatility and drag prices lower; however, in the current environment, many analysts have said that gold remains an attractive asset to buy on dips.
That’s it for this week. To all our American readers, we wish you all the best this Memorial Day long weekend.
Source: https://kitco.com/