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Upward Forces

An outlook of gold prices amid global geopolitical tensions

14 May 2024

Gold serves as a strategic investment and a safe haven for protecting savings during times of economic and political uncertainty across the globe. In recent times, gold prices have soared to record levels, surpassing $2400 per ounce. This surge can be attributed to various factors, including escalating geopolitical tensions in the Middle East and ongoing challenges to the global economy due to wars and the COVID-19 pandemic. As long as the demand for gold remains robust, it is expected that gold prices will continue to rise throughout the year.

Global Gold Demand Trends in 2023

In 2023, global demand for gold reached its highest level in history, totaling 4,899 tons- surpassing the volume of 4,752 tons recorded in 2022. The surge in demand can be attributed to increased purchases of gold by individuals, investors, and central banks. Central banks around the world purchased a total of 1,037 tons of gold in 2023, slightly lower than the 1,082 tons bought in 2022. The People's Bank of China, the Chinese central bank, emerged as the top purchaser of gold among central banks, acquiring 225 tons in 2023.

Despite the gold price setting new records, global annual gold jewelry consumption saw a slight increase year-on-year. However, investment in gold exchange-traded funds (ETFs) experienced a third consecutive year of decline, reaching its lowest level in a decade at 945 tons in 2023. Even though the technology sector witnessed a 12% increase in gold demand in the fourth quarter of 2023, reaching 81 tons, overall demand fell by 4% to 298 tons for the first time in the World Gold Council data series. 

Upward Drivers

Trading momentum in the global gold market is on the rise due to the increasing instability of the global political and economic environment. In 2023, gold achieved record trading volumes, reaching $163 billion daily and a total of $59.4 trillion, which represented 58.4% of global GDP. The cumulative value of gold holdings among investors and central banks also reached approximately $5.1 trillion. The diversity of buyers in the gold market contributes to the dynamics of supply and demand for this precious metal, which are influenced by various factors.

Firstly, the long-term upward trend in gold prices has been supported by geopolitical tensions in recent times. The Russo-Ukrainian war and the Gaza war have increased demand for gold as a safe haven and a hedge against inflation and declining local exchange rates, attracting both investors and individuals.

Another factor contributing to the current situation is economic uncertainty and the weak performance of the global economy. Unfortunately, most forecasts for global economic growth this year have been disappointing. According to the International Monetary Fund, global economic growth is predicted to be 3.2% in both 2024 and 2025, which is the same rate as in 2023. Additionally, the United Nations Trade and Development has warned of further growth deceleration in 2024, attributing it to falling investments and subdued global trade dynamics.

The third factor contributing to the increase in gold demand is the growth in Chinese demand. Apart from the strong demand from the People's Bank of China, which has been consistently buying gold for the past 17 months, private Chinese investors have also shown interest in gold. This interest has been fueled by a contraction in the real estate sector, declining stock market performance, and a weaker yuan. According to Bloomberg Intelligence, money has been flowing into gold ETFs in mainland China almost every month since June. In contrast, there have been significant outflows from gold funds in the rest of the world. The total influx of money into gold ETFs in China has reached $1.3 billion this year, while funds overseas have experienced outflows of $4 billion.

A fourth factor lies in the monetary policy of major central banks. When interest rates rise, investors are more likely to invest in bonds, securities, and other assets, which reduces the attractiveness of gold as an investment. Conversely, when interest rates fall, gold becomes more attractive. The relationship between the dollar and gold prices also plays a significant role in market developments, as gold is priced in dollars. Despite the current record level of 5.5% for US interest rates, the impact of escalating global geopolitical tensions on gold price movements has been stronger than other fundamental and economic factors that countered the decline in metal prices last year. In the future, if major central banks lower interest rates amid subdued inflationary pressures, the gold market may experience a new uptrend cycle.

A fifth factor is the growing interest of central banks. Since 2010, Apex banks have been net buyers of gold, accumulating a total of 7800 tons. Notably, over a quarter of these purchases have occurred in the past two years. Central banks view gold as a valuable asset that supports their reserves and serves as a long-term risk-hedging tool.

Inflation is the sixth major factor that affects gold prices. This is because gold is often sought after as a hedge against rising inflation and declining currency value. In recent years, global inflation has reached record levels due to disrupted supply chains and rising energy prices. The International Monetary Fund reports that global inflation reached approximately 6.8% in 2023. However, it is projected to decrease to 5.9% in 2024 and further to 4.5% in 2025. Despite the expected decline in inflation, it's important to note that gold prices can still be influenced by other factors.

Gold Price Outlook

Based on the data, gold concluded last year at a record level of $2,078.4 per ounce. The average price during the same year was $1,940.54 per ounce, which is about 8% higher compared to 2022. In 2024, gold reached its all-time highest levels, trading at levels surpassing $2,430 per ounce on April 12. This surge occurred amidst a sudden escalation in the Middle East between Israel and Iran.

Forecasts from international institutions suggest that gold prices will continue to rise in 2024. This upward trend is expected to be driven by various factors, including ongoing geopolitical conflicts involving Russia and Ukraine, as well as Israel and Hamas. These factors are likely to contribute to sustained global demand for gold throughout the year, thereby increasing expectations for higher gold prices.

The World Gold Council supports this outlook. In this context, the Council expects gold demand from central banks, gold ETFs, and investors to grow. Additionally, demand for gold from the technology sector is also expected to rise, supported by international trends to enhance the semiconductor industry and expand the use of artificial intelligence applications.

Based on the given data, international institutions express a more positive outlook on short-term gold price forecasts. They anticipate a long-term upward trend for the metal, with expectations of it trading between $2500 and $3000 per ounce. Among these institutions, Citibank is the most optimistic, projecting gold to reach $3000 per ounce within the next 6 to 18 months. Goldman Sachs has also revised its gold forecast, increasing it from $2300 to $2700 per ounce by the end of the year. HSBC Holding plc expects gold to range between $1975 and $2500 per ounce throughout the current year.

In conclusion, ongoing geopolitical tensions and global economic uncertainty are expected to maintain the upward trend of gold prices until the end of the current year, with prices projected to surpass $2400 per ounce. The outlook for the global gold market remains positive in the long term, driven by strong demand from both investors and individuals seeking to protect their savings during times of uncertainty.