The frenzied run-up in gold prices may have taken a pause this past week, but the metal’s two-year hot streak has resulted in some record-busting numbers.
According to the World Gold Council (WGC), total gold demand hit $146bn in the third quarter, largely thanks to “huge” buying by exchange traded funds (ETFs), which hoovered up 222 tonnes in the three months to end September. That, and demand for bars and coins, means investment demand accounted for 55% of all gold purchases.
Central banks aren’t doing too badly either. Year to date, they’ve bought 633t of metal; while that’s lower than the 724t bought in the first three quarters of last year, the WGC expects the spree to continue and reckons central bank purchases could top out at 900t this year.
The WGC’s senior analyst for EMEA, Krishnan Gopaul, tells Currency that investment inflows are the highest they’ve seen since 2020, driven by a strong dose of fear of missing out; what Luca Paolini, chief strategist at Pictet Asset Management has termed “gold-plated fomo”.
Until the market cracked, the gold price had notched up an astounding 27% surge in just seven weeks, peaking at $4,381 an ounce on October 20 before it crashed back below $4,000 an ounce a week later.
Pundits initially attributed the rally to the usual litany of reasons: gold as a hedge against geopolitical tensions, elevated government debt levels, and a shaky US dollar.
Yet gold has rallied in tandem with equities, prompting some, like Ruchir Sharma, the founder and chief investment officer of Breakout Capital, to argue that its gains simply reflect the trillions of dollars unleashed by governments and central banks during Covid that are “still sloshing around the system”.
‘New financial order’
While the WGC has noted some outflows due to the recent price wobble, Gopaul is unconvinced that a mass stampede out of the metal is likely, given that gold remains under-allocated as a share of overall portfolios. In its third-quarter report on gold-demand trends, the council says that “a flood of new investors could easily push holdings through the previous peak given the strategic case to do so remains solid”.
However, it warns of “tactical risks” that could derail further inflows. “These include technical sell signals; a continued easing of tariff tensions; geopolitical resolutions; softening fears over the independence of the US Federal Reserve (Fed); and a rotation out of gold into “cheaper” assets. Such risks naturally proliferate when prices move this fast and holdings approach previous peaks”.
Intriguingly, the central bank of Poland has been this year’s biggest gold buyer, followed by Kazakhstan, Azerbaijan, China and Turkey. Nothing suggests that central banks are selling any of their stocks yet, either, says Gopaul. In Poland’s case, for example, the bank increased its gold target to 30% of reserves from 20% previously.
“In these difficult times of global turmoil and the search for a new financial order, gold is the only safe investment for state reserves,” National Bank of Poland Governor Adam Glapinski said in a statement in September.
The gold price, however, is wreaking havoc in the jewellery market, where volumes of gold bought fell another 19% year on year. It’s the sixth quarter in succession that jewellery volumes have fallen. Yet it’s unlikely to bring prices back to any sort of equilibrium.
“It’s a price taker; in terms of price setting, that’s in the investment sphere – like ETFs and futures,” says Gopaul. “Over the long term, jewellery becomes much more influential … (but) I don’t think jewellery is going to exert any influence over the gold price for a long time.”
Bad news for anyone eyeing a few gilded Christmas knick-knacks, then.
Top image: tvildanov/ iStock/Getty Images Plus
This story was produced in collaboration with Stanlib
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