Outlook for gold in the year ahead

‘We believe gold definitely does still have a role, and the case for it in this environment is still very robust’: Krishan Gopaul, World Gold Council.

FIFI PETERS: The World Gold Council is releasing its core report on gold. It outlines what the market is doing, and it looks at stuff like the amount of gold being produced, the demand, what its uses are presently, what the jewellery industry is doing with it, how investors are reacting to it.

We have Krishan Gopaul, a senior analyst at the World Gold Council, for more on the report. Krishan, thanks so much for your time. I see that there was less demand for gold in the second quarter. It is down around 8% or so. Just talk to us about what is going on in the gold market.

KRISHAN GOPAUL: Thank you for having me. You are absolutely right. We did see some softness in gold demand in the second quarter this year, as you say down 8% year on year. But despite that weakness, owing to significant inflows into gold exchange-traded funds [ETFs] within the first quarter – that actually helped fuel an overall recovery in gold demand over the first half of the year; that was about 12% up on the first half of last year.

Now, what we really saw was those strong ETF inflows driven by rampant inflation and geopolitical risks in the first quarter. That kind of gave way to headwinds for gold in the form of rising interest rates and a surge in the US dollar. That really had a big impact on investment over the first six months.

On the jewellery side we saw that up slightly in Q2 year on year. However, the first half of the year for jewellery demand was down 2% year on year, and it remained below the quarterly pre-pandemic levels that we saw back around 2018/2019 [levels]. And in the most recent quarters it has really been weakened by weakness in Chinese demand owing to their strict Covid policy, which has seen the imposition of lockdowns in many key cities and regions over that second quarter.

But we also saw an impact from global inflation and the cost of living crisis that is being felt in a number of countries across the world.

And then finally it’s worth mentioning central banks. We saw a continuation of strong buying in the second quarter and over the first half as a whole, and that was really driven by a number of different purchases from the likes of Turkey, Egypt, Iraq, as well as more moderate buying from a number of other central banks around the world.

FIFI PETERS: Just given what is happening now, we still have interest rates that are going up. We still have inflation that’s sitting at pretty elevated levels. We now have I suppose deeper concerns of a slowdown in global growth, and perhaps even a recession in some parts of the world. What do these factors do for the outlook of gold in your view?

KRISHAN GOPAUL: Absolutely, absolutely. They’re all very valid points, and what we say in the report and our view is that the macroeconomic outlook presents both opportunities and challenges for gold. So you are absolutely right. The rate of change in monetary policy, the tightening that we’re seeing [from] rising interest rates, [and] the level of inflation that we’re seeing will all have impacts, especially on investment demand.

So, for example, the higher interest rates and the strong US dollar will create headwinds for gold. But there are also those opportunities that we speak about – the geopolitical risk. The potential further economic weakness, again, may be supportive for gold investment demand in particular as a safe haven. However, equally the high level of inflation and, as you said, the cost-of-living crisis, may weigh on other sectors in the gold markets, such as customers of consumer elements, of jewellery and technology demand.

FIFI PETERS: Quite a number of commentators have been talking about gold’s perceived view as an inflation hedge, and have been questioning whether that still stands. What do you say to that? Even the safety element. Is gold the place to go for cover against geopolitical stuff like we are seeing happening, unfolding, with Russia and the Ukraine. And is it a good shield against inflation based on what the data is showing?

KRISHAN GOPAUL: I think what we’ve seen over the first half is clearly [that] investors have seen the value in gold as a hedge. But it’s really worth emphasising the way we look at gold. It’s not in isolation. Its [the] contribution it can bring to a portfolio, whether that be against geopolitical risk or against inflation; when it’s added it adds a basket of assets that are used as hedges – [and that] is when it’s performance really begins to shine.

And on the inflation point, it’s quite interesting [that] when we look at broader measures of inflation, not just CPI, we consider things like money growth where we’ve seen a significant amount of that off the back of the pandemic. And that’s really important because it has two implications. Gold is a global asset and not just a hedge against the price of goods and services in any one particular country. But also by using money supply it also measures the erosion of purchasing power in general, whether property, collectibles, financial assets that are including CPIs, and it’s also a hedge against the debasement of currency, should that currency value also be eaten away as the supply of it is increased.

And so our analysis has found that that goal can provide value as a hedge in a kind of well-diversified portfolio. So absolutely, we believe that gold definitely does still have a role and the case for it in this environment is still very robust.

FIFI PETERS: All right. Good to know. Krishan, thanks so much for your time, sir. Krishan Gopaul is a senior analyst at the World Gold Council.

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