The World Gold Council (WGC) released a mid-year outlook report on July 2, stating that gold has performed well so far this year. Gold has seen a 12% rise in returns year-to-date, outpacing most major asset classes. The precious metal has benefited from central bank buying, Asian investment flows, resilient consumer demand, and ongoing geopolitical uncertainty. The critical question now is whether this momentum can continue.
Despite global economic growth showing signs of slowing, gold has remained strong. Central banks have continued to buy, and Asian investors have maintained their interest. However, the WGC notes that the global economy is in a transitional period. Lower but persistent inflation and cooling labor markets create a challenging environment.
“Our analysis suggests that the gold price today broadly reflects consensus expectations,” the WGC states. “But the global economy and gold are waiting for a catalyst.”
The WGC believes this catalyst could come from falling rates in developed markets, attracting Western investment flows. Continued support from global investors looking to hedge against risks amid a complacent equity market and persistent geopolitical tensions is also crucial. However, the outlook is not without risks. A significant drop in central bank demand or widespread profit-taking from Asian investors could impact performance.
Despite high global interest rates and a strong US dollar, gold has broken record highs multiple times between mid-March and mid-May. Gold traded above $2,300 per ounce for most of the second quarter, providing double-digit returns across multiple currencies. The WGC explains that the relationship between gold, real interest rates, and the US dollar has likely prevented gold from rising further, but other factors have offset this.
The WGC attributes gold’s record-breaking performance this year to continued central bank purchases, strong Asian investment, and resilient global retail consumer demand.
The WGC notes that bond yields have moved sideways as Western central banks have kept policy rates on hold. However, pressure is mounting on policymakers to balance lower but stubborn inflation and signs of cooling labor markets. For example, the European Central Bank (ECB) cut rates sooner than expected, while the Bank of England and US Federal Reserve have remained unchanged.
“India remains an economic bright spot, and China will likely continue finding measures to invigorate growth,” the WGC states.
According to the WGC’s Qaurum gold valuation tool, the current gold price broadly captures consensus expectations for the second half regarding economic growth, interest rates, and inflation. This suggests gold may continue to move within a similar range as seen in recent months.
Western investors have been a missing part of the puzzle. Retail investment demand has been low, and gold exchange-traded funds (ETFs) have seen net outflows year-to-date. Gold’s strong performance, despite the absence of strong Western flows, indicates the market is not saturated and could see further gains.
Demand from Western investors could be triggered by three key sources: interest rates, recession risks, and geopolitics. European gold ETFs have experienced inflows since the ECB’s rate cut in May. A continuation of this trend would support gold prices.
While a recession remains a low probability in the short term, the global economy continues to underperform. Central banks are not ready to cut rates aggressively yet due to above-target inflation. The WGC notes some complacency in financial markets, with global stocks doing well and US stocks leading the pack. Yet, signs of slowing manufacturing and company earnings could impact gold.
Geopolitical risks are also on the rise, with political polarization, armed conflicts, and a shift from globalization to nationalism fueling economic instability. The WGC states that gold reacts to geopolitics, adding 2.5% for every 100-point increase in the geopolitical risk index.
The WGC expects central bank demand to remain above trend this year, despite lower reported gross purchases compared to last year. Gross sales have decelerated, primarily due to the absence of large-scale Turkish sales seen in early 2023. Central bank demand is often policy-driven, making timing difficult to ascertain. However, gold reserve managers believe they will retain a positive outlook towards gold.
Asian investors have been significant contributors to gold’s recent performance, evidenced by bar and coin demand, gold ETF flows, and over-the-counter market activity. The WGC notes that Asian investors have followed the trend rather than buying on dips, as seen in previous periods.
Gold consumers, including those in the jewelry and technology sectors, play a crucial role in determining performance. These sectors make up more than 40% of yearly demand. Consumers typically respond to price and income. The sharp upward trend in gold prices has dampened demand in some markets, but positive economic growth can counteract this effect.
The WGC suggests that possible gold price stability could lure back consumers who respond more negatively to volatility than to price levels. This is particularly relevant for India, where economic growth expectations are higher than in other regions.
The WGC’s analysis shows gold’s likely reaction to underlying conditions and alternative scenarios. Gold may remain rangebound if current market expectations prevail, but there is a clear path for gold to outperform, likely fueled by Western flows. Conversely, a drastic drop in central bank demand, sustained high rates, and a flip in Asian investor sentiment could lead to a pullback in the second half.
Overall, the extent of gold’s reaction will depend on the magnitude of these factors. A robust asset allocation strategy must consider market consensus and alternative views, with gold playing a key role as a diversifier and source of liquidity.
Source: Mining Weekly
