GEOPOLITICS: Gold has been the go-to safe haven amidst surging geopolitical uncertainty and the tall wall-of-worry. Benefitting from its lack of credit risk, negative correlation with risk assets, and millennial track record. Its rise back toward $2,000 per ounce has outpaced other traditional havens like the US dollar and certainly bonds. This move has further dramatically broken the long-standing correlation of zero-yielding gold with real and nominal US bond yields (see chart). This introduces some short-term vulnerability to gold if geopolitical risks cool. Though the broader outlook is supported by likelihood of lower bond yields and a weaker dollar in coming months, against a backdrop of continued strong central bank demand. @GoldWorldWide.
DISCONNECT: Global economic policy uncertainty is high and geopolitical risk rising. This ‘new normal’ may continue to underpin safer haven demand for gold and supports a modest paradigm shift for the traditional bond yield correlation. Additionally, the speed of the bond yield move may itself have stoked fears something will break in the global economy, driving demand for gold. The world’s top two gold buyers are also supportive. Chinese investors have been diversifying away from its challenged local property market, driving a record $120/oz ‘shanghai premium’ last month. Whilst India is moving into its seasonally strong festival ‘buying season’.
FUNDAMENTALS: Central Bank buying has been at record levels and a big support. This is led by China and has taken gold’s weight in its world-largest $3 trillion FX reserves to over 4%. But this only goes so far with central banks only 20% of the total market and dwarfed by still sluggish jewelry and tech (45%) and other investor (35%) demand. ETFs like the $55 billion GLD have seen modest outflows until very recently. Whilst gold mine supply has been rising robustly in the background, up 7% last quarter, and incentivised by continued high prices.
All data, figures & charts are valid as of 25/10/2023.