Since the outbreak of conflict in the Middle East and disruptions to global maritime trade through the Red Sea, gold prices have advanced. Previously, gold had rallied in the face of higher US real interest rates and a stronger US dollar. Should one still invest in gold in 2024?
The appeal of gold is often questioned as it is an asset that pays no dividend (unlike equities), no coupons (unlike bonds), and no rent (unlike real estate). Nonetheless, as a financial asset, gold can benefit from fundamental, economic and geopolitical factors that are particularly important in troubled times. The recent imbalance between supply and demand has provided further support.
Gold is a real asset that has historically acted as a safe haven in times of crisis. Central banks also see it as a defensive asset. It can be a hedge against an increase in inflation, particularly when inflation reaches high levels.
The role of real rates
Historically, gold has been an asset that is inversely correlated with real rates: Gold becomes less attractive as real interest rates rise because the opportunity cost of holding an asset with no yield goes up. Over the last 18 months, however, this inverse correlation has broken down. As real rates rose to a high of 2.5% in October 2023, gold prices also generally rose (Exhibit 1). This resilience may be due to the geopolitical factors described further on.
Gold and the dollar – A well-identified relationship
Another economic factor influencing gold prices is the US dollar – gold tends to advance when the dollar falls. This is a mechanical effect: The reference price of gold is denominated in dollars. All else equal, if the dollar appreciates, the amount of dollars needed to buy the same amount of gold decreases and the price of gold falls.
As a result, demand for gold increases when the dollar falls as it makes it cheaper for major jewellery buyers in countries such as India or China to purchase the metal. We have a negative view on the dollar given the US trade and budget deficits and the relatively high cost of financing that debt, which should be positive for gold prices.
The geopolitical factor
The gradual transition to a global equilibrium that is no longer centred around the US and the rise of China has induced a new geopolitical dynamic.
The enlargement of the BRICS organisation (Brazil, Russia, India, China and South Africa) to include Iran and Saudi Arabia (among others), creating ‘BRICS+’, testifies to this phenomenon and to a shared desire to find an alternative to the dollar (‘de-dollarisation’).
In addition, the freezing of the Russian central bank’s assets on 28 February 2022 accelerated the appetite of other emerging market central banks for greater gold reserves.
Demand from central banks remains high: According to the World Gold Council, 1,136 tonnes were purchased in 2022, an increase of 152% compared to 2021 and the highest level since 1971. Net purchases in 2023 almost equalled this record, at 1,037 tonnes.
This demand supports the price of gold and could be seen as a new ‘put’ by central banks.
Conclusion – No yield but many other advantages
It is true that gold does not generate income, but it can be valuable when purchasing power declines. It can therefore be a good asset for diversifying a portfolio at a time when bonds perhaps fulfil this role less well. It can help minimise the impact of crises and peaks in inflation thanks to its status as a safe haven and as a (central bank) ‘reserve’ asset.
Gold has been benefiting from the gradual normalisation of real rates and has been supported by the growing appetite of central banks. Strong demand while supply is limited is yet another factor in gold’s favour.
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