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Asset Management / Wealth Management
Gold’s continued rise defies historical paradigms
Central bank purchases, move away from greenback bolster precious metal
The Asset 29 Feb 2024

The price of gold is expected to remain above US$2,000 per ounce in 2024, reaching new historical highs amid favourable factors such as geopolitical uncertainty, the likely weakening of the US dollar, and potential interest rate cuts, according to international broker Octa.

For the past 90 years, the value of gold has depended primarily on the volume of transactions between Western and Eastern markets. Western countries determined supply and demand, while Eastern countries acted as counterparties to the transaction.

When the volumes of physical gold purchased by the United Kingdom or Switzerland increased, its price grew, and vice versa. As a result, gold moved from the West to the East and back synchronously with the price decreasing or increasing.

Another factor that has historically influenced the price is the relationship between the price of gold and the real yield on US government bonds. When the real yield decreased, bonds lost their appeal, and investors moved into gold. Once the trend reversed and real yields began to rise, investors returned to bonds.

However, since the end of 2022, both patterns have failed. The yield of US ten-year treasuries rose to 4.33%, above the 2022 highs, beating a 15-year record. Nonetheless, the price of gold rose 16% to US$1,954 per ounce in August 2023, from US$1,643 in November 2022.

The correlation between gold transaction volumes and the gold price also stopped working. Since the third quarter of 2022, the UK and Switzerland have been net sellers of gold. According to the historical paradigm, this should also have been a reason for the price of gold to fall.  However, this is not happening, Octa says, noting that the West has not significantly influenced the pricing of the precious metal.

Geopolitical factors

Amid rising geopolitical tensions, dollar assets have become riskier for many countries. Since the end of 2022, central banks in the Global South, Eastern Europe, and the Middle East have been actively pursuing a policy of building up the gold part of their foreign exchange reserves.

According to a World Gold Council (WGC) report, central banks bought 800 tonnes of gold in the first nine months of 2023, up 14% year-on-year. Excess demand from central banks boosted the value of gold by 10% in 2023.

“It is the central banks' purchases of gold that will act as the main driver of growth in 2024,” says Octa financial market analyst Kar Yong Ang. “If the trend continues and the level of gold reserves moves towards an average of 40% of the gold composition in reserves, that would mean an additional US$3.2 trillion in the asset – a 25% rise in 2025, which would correspond to a price of US$2,500 an ounce.”

The Gaza conflict has further boosted the price of gold, which has risen by over 8% since last October.

Meanwhile, the stabilization of inflation will continue to support gold quotes. In 2022, global inflation reached its highest levels in decades before passing its peak at the end of 2023. Most analysts believe inflationary pressures will continue to ease this year.

“Traditionally, the gold price has been negatively correlated with the inflation rate. The lower the inflation rate, the lower the interest rates on government bonds. As a result, the relative attractiveness of non-interest-bearing assets such as gold increases,” Ang explains.

De-dollarization trend

Investors see gold as an alternative means of building savings and protection against inflation and currency risk. Demand for gold is increasing because Brazil, Russia, India, and China are seeking ways to improve their currency independence.

The main factors affecting gold's price are inflation, rising demand from central banks, de-dollarization of developing economies, microeconomic situation, and geopolitics. The combination of these factors will create conditions for the growth of gold price in 2024.

In the first half of the year, the cost of the precious metal may exceed US$2,200 per troy ounce. In the second half of the year, the upward trend in gold is likely to continue, and gold may reach US$2,300 per ounce, so the average price in 2024 will be US$2,170, Octa predicts.

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