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Gold prices have risen sharply recently, reaching $2,050 an ounce in early January. Three months earlier, the same price was just $1,860. If we look at a longer period, before the intense phase of Covid and the Russo-Ukrainian war (i.e. about four years ago), the price was even as low as $1,860 at $1,300. Gold as an investment was also recommended by our experts in our usual collection at the beginning of the year. In this article we show why you can expect a strong year and in which scenarios it is worth investing in metals.
An escape device
Gold is a kind of classic defense tool. When things are going well in the world, it’s easy to forget that because then you can invest in companies, i.e. stocks, corporate bonds or even real estate. However, if the crisis comes, the economic downturn occurs, inflation occurs, geopolitical tensions worsen, then there is again the eternal possibility, namely the escape into the store of value with a history going back thousands of years.
Then the gold investor is the type of person who constantly pushes for crises and wars because then he earns more?
No, not at all, at least according to Gergely Juhász, CEO of Conclude Zrt., which deals with investment gold trading, and founder of Goldtresor, which stores physical precious metals.
European and American investors living in the northwestern half of the world typically do not hold exclusively gold in their portfolios, even if they are of the more cautious type. Therefore, when investing, assets are valued primarily based on positive news. Gold’s primary function is to provide security and to be a defensive instrument in times of major price losses.
That’s how the World Council sees it
The World Gold Council brings together the entire gold industry and produces analyses. The organization’s latest documentary, “The History of Gold with Idris Elba,” examines the role gold has played in human civilizations over the millennia.
The organization’s outlook for 2024 (which can be read after a simple registration) explains why investing in gold this year may make sense in various scenarios. According to the organization, the most important factors influencing gold prices this year are economic growth, returns from alternative investment products, risks and the behavior of central banks.
The expected lower nominal interest rates can increase the value of gold: if the benchmark interest rate in a developed market falls by 75-100 basis points, all other conditions remaining unchanged, a 4 percent increase in the price of gold is likely.
The Council’s analysis assumes that the increase in geopolitical risks is about the same size (in 2023 the analysis no longer mentioned the Russian-Ukrainian war, but rather Gaza and the bankruptcy of the Silicon Valley Bank), but assumes that this is not the case This will be the case. Risks exist in a year when important elections are taking place in the US, the EU, India and Taiwan. The World Council sees the greatest influence in the demand created by central banks – we will go into this in more detail later.
It can work for better or for worse
Let’s simplify market expectations for 2024 into two scenarios:
- a quieter, stronger year of growth (soft landing);
- a year fraught with problems, which also featured recession phenomena (hard landing).
Most of the market expects the former, that is, that the Fed will slowly cut interest rates, that bond yields in the most developed parts of the world will remain attractive, that investors in the northwest will not have to flee to gold, and alternative instruments will also remain attractive .
The second worst scenario is that the economy grinds to a halt and a recession occurs. However, from the perspective of gold, it is easier to simply arrange the latter, since
Gold has historically almost always performed well during recessions.
But what if there is no crisis if the soft landing is successful? As Gergely Juhász says, precious metals are also highly recommended for this case, with one small change: With precious metal investments, it is worth trying a ratio of 80 to 20, i.e. keeping 20 percent silver and/or platinum in addition to 80 percent gold. These raw materials are sensitive to growth, because for the metals of the renewable energy sector, which are in high demand in times of economic recovery, the annual silver demand is practically 8-10 percent higher than what the mines can produce.
However, last year the market was so balanced that the major ETFs (Exchange Traded Funds) made profits and sold their shares. However, when surface stocks dwindle (that is, stocks that have already been mined but are still in storage are bought up by the industry), hysterical price increases can sometimes occur. (Silver also rose last year, but this market is increasingly volatile.)
Others are optimistic
According to Henk-Jan Rikkerink, global head of multi-asset (multiple investment groups) at Fidelity International, it is also worth preparing for worse scenarios in 2024, at which point the safe-haven currencies (such as the dollar, the Yen and possibly the Swiss franc) and gold regularly performed well.
Should a global risk aversion scenario become necessary again, the US dollar and Japanese yen, gold and certain safe bonds could appreciate again. According to the expert, more stable sectors, companies with more balanced balance sheets and less indebted companies represent stability in the stock market. Smaller ones, those that work with high exposure, growth papers less.
According to András Láng, the private banker at SPB Befektetési Zrt., the price of gold in 2024 will be mainly influenced by the development of long-term real yields, purchases of gold by central banks (such as China), the recession – or the attempt to avoid a recession – and the US presidential election. Since these are unpredictable factors, each of them also creates some kind of uncertainty. In such cases, gold has historically appeared volatile as it always offers some kind of escape compared to other assets.
Demand from central banks
Tamás Pletser, oil and gas industry analyst at Erste Bank, has already bet on gold in our end-of-year investment overview. According to him, several factors can increase the price of gold. This is the accelerated purchase of gold by central banks. The BRICS member states (Brazil, Russia, India, China, South Africa) in particular are buying a lot because they do not want to keep their reserves in the currencies of the Western world (dollars, euros), which are considered unfriendly.
According to data from the World Gold Council, central banks are buying 300-400 tons of gold quarter to quarter, which is significantly more than usual. In the past period, the largest buyer was the People’s Bank of China (PBoC), whose gold holdings had already increased to 2,192 tons. But a neighboring country also bought a lot: the Polish National Bank (NBP) already owns 334 tons of gold with an accumulation of 100 tons. Finally, recent purchases increased Turkey’s gold reserves to 668 tons.
Development of central bank demand for gold – Source: World Gold Council
In addition to the major buyers, eight other central banks recently bought at least one ton: India, Uzbekistan, the Czech Republic, Singapore, Qatar, Russia, the Philippines and the Kyrgyz Republic.
On the other hand, only Kazakhstan officially reported sales, although Bloomberg knows that Bolivia also sold. This also shows that there are countries where the buying and selling of gold is not so transparent, for example on the buyer side it is said that this was the case in Libya, that is, they believe they have bought, but there is There is no reliable information on this.
According to estimates by the World Gold Council, outstanding demand for gold from central banks in 2023 caused gold prices to rise by 10 percent. In 2024, demand will hardly be as high as in the previous two years, but purchases (if sales are not typical this year either) can provide continued strength to the market.
Investments in installments
So there are enough buyers in the gold market and everyone assumes that central banks will buy 400-500 tons this year, if not 1,000 tons per year. If you are interested in how many precious metals look like at the same time, you can check out records of the company’s stock audit in Zurich on Goldtresor’s website. According to András Láng
Even if investors do not want to buy gold physically but on the capital market, they have many options.
The most popular option is to purchase an ETF that holds physical gold. Thanks to economies of scale and other cost-cutting methods, these funds agree to store the gold purchased by investors for a minimal annual fee.
The largest investment fund holding physical gold in Europe is BlackRock’s iShares Physical Gold, which can be purchased in dollars on the London Stock Exchange. In euros, the Wisdom Tree Physical Gold investment fund traded on the stock exchange could be of interest to investors.
The article from the American investment portal Fool.com highlighted that not only can gold be bought directly, that is, as a physical or paper product, the latter can be an option, a futures product or even a commodity market ETF, but sometimes it is a better idea, Corporate participants to buy on the gold market. We can think of different types of companies: natural resources companies, mining equipment companies, wholesalers – Fool.com offers several options such as the world’s largest gold miner, Barrick Gold Corporation, Canadian mining company Franco-Nevada Corporation and VanEck Vectors Gold Miners ETF, an exchange-traded Fund that covers the entire industry.
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