What’s behind the surge in gold?

Amidst geopolitical uncertainty and market volatility, gold stands out as a steadfast asset.

Traditionally a “safe haven” during turbulent times: one would expect the price of gold to increase when the economic outlook is bleak, and stabilise in times of economic optimism.

This is why the recent trajectory of gold’s price to new nominal heights is somewhat of a puzzle – the surge has come despite burgeoning optimism about the US economy, a sentiment that has propelled riskier investment options, including stocks and cryptocurrencies like bitcoin, to unprecedented levels.

Analysts from JP Morgan’s Global Commodities Research team noted, “Gold’s sharp jump to new nominal highs has surprised us in its intensity” [1], highlighting the unexpected nature of this development.

Understanding the Surge

One of the main reasons for the gold price surge was an expectation that the US Federal Reserve might reduce interest rates on the back of weak consumer sentiment and moderate inflation data.

Lower interest rates tend to enhance the attractiveness of gold, which, unlike other investment vehicles, does not yield income through dividends or interest.

The gold price surge has also come despite an increase in “real yields” (the return on treasury bonds minus inflation). When real yields go up, the expectation would be for gold to take a hit, but the opposite has happened.

Gold has managed to secure a substantial gain of 23.76% (USD) since March 2021, with a remarkable increase of 45.76% in NZD over the same period.

Global Factors at Play

Central banks are buying more gold. After the 2008 global financial crisis, and more recently after Russia’s invasion of Ukraine in 2022, central banks have significantly ramped up their hold of gold reserves [2].

Due to the global economic and geopolitical uncertainties, this trend highlights the need to strengthen financial security.

Turkey and China have led the charge in gold acquisitions in recent times, as they aim to reduce their reliance on the U.S. dollar as the dominant global reserve currency.

In the UK, gold purchases surged following the country’s dip into recession in late 2023, highlighting gold’s appeal during economic downturns.

Similarly, in China, demand for gold has skyrocketed amid challenges in the real estate sector, stock market volatility, and increased demand fuelled by consumers aged 25-34 [3].More on this below.

China’s Younger Population Drives Surge in Gold Demand?

(240212) — JINAN, Feb. 12, 2024 (Xinhua) — Customers select gold jewelry at a gold shop in Jinan, capital of east China’s Shandong Province, Jan. 27, 2024. (Xinhua/Zhu Zheng)


In China, a notable shift in gold consumption is underway, led by the younger generation, particularly those aged between 25 and 34 [3].

This demographic now represents the majority of gold buyers, with national gold consumption reaching nearly 1,090 tonnes in 2023, an increase of 8.78% year-on-year.

Young Chinese see gold as both a fashionable accessory and a viable investment option, in light of its strong performance in the capital market.

The increase in demand is also influenced by the integration of traditional Chinese designs into modern gold jewellery, appealing to young consumers’ tastes.

This has led to a rise in the consumption of gold jewellery and investment in gold bars and coins.

Due to gold’s ongoing appeal as a safe investment, this age group is increasingly embracing gold both as an element of their cultural heritage and as a sensible part of their financial planning.

Is the Gold Price Rally Sustainable?

With central banks buying up gold and traders following the trend, there are questions about how sustainable this upward trajectory is.

High prices might deter further buying by central banks, and traders may be nearing their position limits, potentially capping future price increases.

Yet, the prospect of continued interest rate adjustments by the Federal Reserve provides a potential catalyst for further gains.

Analysts and investors alike watch closely for signals of impending rate cuts, which could further bolster gold’s appeal as a safe-haven investment.

Sources:
[1] “What You Need to Know About Gold’s Curious Rally,” The Wall Street Journal, [Accessed 14 March 2024].
[2] “Central Banks Accumulate More Gold,” World Gold Council, [Accessed 14 March 2024].
[3] “China’s Young Generation Powering Gold Rush,” People’s Daily Online, [Accessed 14 March 2024].