High interest rates and inflation see investors flock to gold

Despite declining central bank purchases, gold demand remains strong, fueled by investors that continue to flock to the safe haven asset in the high inflation and high interest rate environment.

The World Gold Council reported the Gold Demand Trends for Q2 2023, which saw global gold demand down 2% year-on-year but gold investment up 20% year-on-year.

Chief market strategist for the World Gold Council, Joseph Cavatoni, told 702’s The Money Show that gold is a unique asset that continues to surprise on the upside.

“When you just think that demand from investment, for example, might be down, we are pleasantly surprised by another form of demand – whether it’s in bar and coin with retail investment or with central banks where we continue to see record-setting numbers coming in across the globe,” he said.

Since the start of the year, the gold price has surged to levels previously seen during the Covid-19 pandemic.

The gold price skyrocketed to its highest level in decades in August 2020, during the Covid-19 pandemic – a period filled with uncertainty and turmoil. The price reached a decades-long high of $2,067.15 per ounce in August 2020.

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

However, the gold price started climbing again at the end of 2022 and peaked in March 2023, when the price was $2,037/oz.

2023 has proven to be an excellent year for gold, as the price has not dipped below $1,800/oz ce since the start of the year and has been above $1,900/oz since mid-March 2023.

Gold is currently trading at just below $2,000/oz.

The gold price (USD/oz) from January 2020 to August 2023. Source: World Gold Council

‘Safe haven asset’

One 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 continued in Q1 2023 but slowed down slightly in Q2 2023, reflected in the slight dip in gold demand.

Q2 2023 saw around 103 tonnes of gold purchased by central banks – a 35% year-on-year decrease. Central banks purchased 158.6 tonnes of gold in Q2 2022.

However, this dampened central bank demand was offset by the significant increase in investor demand. 

Investors bought 256.1 tonnes of gold in Q2 2023, with demand from China increasing by 32% year-on-year.

Cavatoni said this robust demand relies on gold’s reputation as safe haven asset.

“What these investors are finding is having that safe haven asset in their portfolio, number one, provides them long-term strategic returns, and that’s what we’ve seen over the last five years for sure,” he said,

“Secondly, they find it protects them in those moments of systemic events – whether it’s the Russian invasion of Ukraine or a banking blip – but those moments when things are happening quickly, that shock absorber in your portfolio is where people need to be.”

Cavatoni said this is not only true for investors but also for central banks.

Joseph Cavatoni

Central bank buying

Despite the decrease in central bank demand in the past quarter, he pointed to the 6% year-on-year uptick in bar and coin investment, mainly driven by Turkey.

Turkey provides an example of a central bank using its gold reserves “to do exactly what you need it to do”.

In this past quarter, Turkey experienced an election, onshore political tensions, a crisis with its currency, and a balance of payments issue.

In response to this volatility, Turkey’s central bank tapped into its gold reserves and sold into the onshore retail market.

“Having been a leading buyer throughout most of Q1, the Central Bank of Turkey (TCMB) abruptly flipped to being a significant net seller in March,” according to the World Gold Council’s Gold Demand Trends Q2 2023 report.

Selling continued in April and May before purchasing resumed in June – resulting in net Q2 sales of 132 tonnes. 

“The TCMB sold gold into the local market in response to very tight conditions following a temporary partial ban on gold bullion imports at a time of economic and political uncertainty resulting in very strong domestic gold demand.”

“We believe the selling was tactical rather than a strategic change in Turkey’s long-term gold policy.” 

Turkey’s gold reserves have fallen by a net 102 tonnes year-to-date.

However, despite Turkey’s large net selling in Q2, Cavatoni said there were still positive flows from central banks.

“What we continue to see is that inflation, the need for liquidity, concerns around a dollar weakening or strengthening and how to read that as we come into this new section of monetary policy that we’ve been saying – gold does really well in those types of environments,” he said.

“And that’s why we continue to see it highly demanded from the central banking community.”

“Where we’re waiting to see it come back online is when we crest out of this rate-rising environment in the US, and we start to see the investment community take a step back in.”