Gold shines amid uncertainty

Since the start of the year, the gold price has surged to levels previously seen during the Covid-19 pandemic. The return to this “safe haven asset” indicates concerns, risks, and fears in markets worldwide.

As South Africa and other countries are headed for recessions, investors, retailers, and central banks have increasingly turned to gold as a hedge against economic turmoil. This has led the gold price to soar over recent months.

Market Strategist at the World Gold Council, Joseph Cavatoni, told Business Day TV that the risks of rising inflation, geopolitical tensions and market uncertainty drove central banks and investors to gold. 

The gold price surged to its highest level in decades in August 2020, during the Covid-19 pandemic – a period filled with uncertainty and turmoil.

While the price decreased after this spike, it has remained mostly steady and above pre-pandemic levels. 

However, the gold price started climbing at the end of 2022 and has not stopped. 2023 has proven to be an excellent year for gold, as the price has not dipped below $1,800 per ounce since the start of the year and has been above $1,900 since mid-March 2023.

Currently, gold is trading around the $2,000 per ounce level.

An overview of the gold price per ounce over the past year, captured on 16 May.

Cavatoni said the rise in the gold price is attributable to several factors.

One reason is an ongoing heavy concern around how inflation is being managed, which is a headwind for gold, which is seen as a hedge against inflation.

Another reason for the gold price surge this year is central banks stocking up on the safe haven asset. 

In 2022, particularly in H2, central banks doubled their gold purchases compared to the purchase rate over the last decade. 

This trend has continued in Q1 2023. Cavatoni estimates that around 228 tons have been bought by central banks in this quarter, mainly by China, Singapore, and Turkey.

It is driven by central banks seeing diversification benefits and “dealing with their own concerns around inflation”, he said.

Many central banks worldwide, including the South African Reserve Bank, have been in interest rate hiking cycles for months to manage inflation. This has muted economic growth, which has set off fears of a looming recession.

“That’s when gold will shine as a safe haven asset,” said Cavatoni. “You’ll see, as per our data in the past five of seven recessions, gold performs exceptionally well, and that’s where you want to see gold as an allocation.”

Therefore, the gold price will likely remain high as markets look to safety and stability during times of turmoil and slow to no growth.

Another factor in the gold price is geopolitical tension, which goes hand-in-hand with market uncertainty.

The Russia-Ukraine war continues to create uncertainty in the European market, though the effect has been slightly muted since the conflict breached its first anniversary.

The European and US banking crisis in Q1 2023 added to market uncertainty, driving the demand for gold and its price higher.