Market Views: How high can gold prices go?

Inflation, banking crisis, and a weakening US dollar are putting gold under the spotlight. AsianInvestor asks asset managers if gold prices have hit a peak or if there is more room for prices to rise.
Market Views: How high can gold prices go?

Gold once again pushed above $2000 per troy ounce in April, marking the third monthly period when gold has traded above that level in nominal terms.

The shiny metal closed the first quarter with a 7.96% gain; the bulk of this jump occurred in March, when it gained 7.79%.

Central bank gold purchases also had a strong start to 2023 with 74 tonnes bought in January and another 52 tons in February according to the World Gold Council.

China and Turkey were among the key buyers.

Inflation, a weaker US dollar, worries about the banking sector, and market volatility amid looming recession, are seen as key catalysts for the elevated price of gold.

Gold traditionally performs well during periods of uncertainty and heightened market risks.

AsianInvestor canvassed views from investment experts on the outlook for gold and the role it could play in investors' portfolios.

The following contributions have been edited for clarity and brevity.

Ben Bennett, investment strategist, APAC
Legal & General Investment Management

Ben Bennett

The price of gold is close to its all-time high, although its real purchasing power (i.e., deflated by US inflation) is still slightly lower than recent peaks in 2020 and 2011 and far lower than the spike in the early 1980s.

Indeed, this link to real spending has been a key driver of gold’s recent strong performance as investors value its historic inflation-hedging power.

While fiat currency can be debased by turning the printing presses on, gold holds its value given its limited and steady supply, as inflation erodes everything else.

The recent US dollar weakness and the flight to quality motivated by several banking collapses are two other factors contributing to the elevated price.

I do not believe the trend will fade any time soon. Both the stickiness of inflation and the chance of a recession in the US and Europe later this year are likely being underestimated by investors.

This combination could see the price of gold take another leg higher in the coming months. But even if this isn’t the case for the near-term macro outlook, gold still has a place in portfolios as a deep tail hedge for unlikely and unpredictable scenarios.

Kerstin Hottner, portfolio manager commodities
Vontobel Asset Management

Kerstin Hottner

Despite close to record high levels over the past few weeks, we believe that gold prices have potential to raise in the coming months.

Lower yields, a weaker US dollar and uncertainties around the stability in the financial sector, were the perfect tailwind for gold to move higher recently.

However, with strong data from the US labour market, more hawkish comments by Federal Reserve members and together with spillover effects in the banking sector not materialising, gold gave up some of its gains.

These dips can be used for institutional investors to top up their gold exposure.

We see upside potential for gold for the rest of the year with a target of $2,200 per troy ounce.

With lower inflation expectations and lower energy prices, the Fed can pause its rate hiking cycle in summer.

If they see a deterioration in the economic activity, they might even cut rates in the second half of the year.

Lower interest rates are translated into lower opportunity costs for holding gold and are usually the most important driver for gold prices in the long run.

However, until Fed rate cuts materialise, the market will price in a higher likelihood for recession risk in the US which should support demand for safe-haven assets, such as gold.

Another bullish aspect of gold is the intensifying discussion around the debt ceiling in the US.

The approaching deadline and the lack of process so far might introduce some credit risk in the US treasury market, which should benefit gold.

At the same time, physical demand for gold is still strong. Central banks were buying record amounts of gold last year and we see still strong buying numbers for the start of the year.

Additionally, the reopening in China is [leading to] rising jewellery demand.

John Reade, chief market strategist
World Gold Council

John Reade

COMEX trading speculators were very much involved in the move (of gold price) turning a rare net short position of more than 100 tonnes at the start of November into a 450 tonnes net long position at the start of April.

ETF investors were slower to react to the move in gold, but added to aggregate holdings in March after 10 successive months of outflows before that.

Aggregate ETF holdings increased by 32 tonnes in March and are up about 14 tonnes so far in April.

Gold investors – as well as participants in all financial markets – are closely following US economic data as a guide to what the Federal Reserve will do next.

Any signs that the Federal Open Market Committee (FOMC) will halt interest rate hikes, or a reappearance of acute stress on banks will likely be the catalyst for further gains. But if the Fed turns more hawkish, there is room for some profit-taking after gold’s strong gains over the past five months.

Robin Tsui, APAC gold strategist, SPDR ETFs
State Street Global Advisors

Robin Tsui

We believe demand for gold among global investors in coming months will continue to be robust with increased positive sentiment, rising gold ETF inflows, rebounding COMEX net long gold positions, while central banks, led by strong purchases from China and Singapore, continue to post net purchases in 2023.

On top of this is the growing expectation for the Fed to end its current rate hiking cycle in the second half of 2023.

This macro environment could prove to be a significant tailwind for gold’s prospects, while interest may continue to grow among investors looking to protect against downside risks of systemic events, geopolitical risks, and potential recession.

Since September 26, 2022, gold price has risen over 24% and it has been consolidating well near $1,950 per ounce since mid-March.

We believe it is not outside the realm of possibility for gold to test its all-time high price of $2,075 per ounce in the coming months. 

Steve Land, portfolio manager
Franklin Gold and Precious Metals Fund

Steve Land

Gold has achieved this level without much help from physical gold ETF investment, which seemed to be the main driver behind the two previous moves above $2,000 per troy ounce given the rapid increase in ETF holdings leading to August 2020 and March 2022 highs. 

Physical Gold ETFs, although a relatively small part of the entire gold market, have historically tended to be one of the more volatile sources of demand and supply in the gold market and as a result, often had an outsized impact on price.

The fact that the current price increase has occurred with relatively little lift in gold ETF holdings is encouraging - holdings are up about 1.6 million ounces from their recent lows in March, but still below the levels where they started at the beginning of 2023.

Purchases by central banks and buyers of coins, bars or jewellery all tend to be much stickier holders given higher transaction costs.

Although we don’t see a near-term threat to the dominance of the US dollar as the preferred currency for global transactions, its position is under threat at the margin which could have longer-term implications for central bank reserve holdings.

Gold has a long history as a reserve currency alternative not tied to any one country or financial system.

Gold has a strong negative correlation with the US dollar, so the recent US dollar weakness has certainly helped gold prices.

Much of the price-sensitive demand for gold comes from outside of the US with purchases in local currencies, so a weaker dollar makes gold less expensive for many of these buyers.

As a result, further US dollar weakness, or renewed buying by financial investors that tend to favour physical gold ETFs could help the gold price move even higher.

Michael Kelly, global head of multi-asset
PineBridge Investments

Michael Kelly

We think gold is a ‘down the road’, instead of a ‘contemporary’ inflation hedge.

It interprets moves in real interest rates as causing future inflation.

The gold asset class loves real rates falling (interpreting that as causal for future inflation rising).

Despite inflation rising and stocks falling in 2022, gold didn’t have a good year as a result of the real policy rate being ratcheted higher. 

Recall March’s flirtation with financial instability as the result of the Silicon Valley Bank failure?

It doubled the pleasure for gold as uncertainty spiked while the rates curve plummeted.

One month later, regional banks do not appear to be slashing loans and all of the sudden the Federal Reserve can no longer count on bank lending conditions tightening to the extent this finishes off the Fed’s job for them.

So, the yield curve and real policy rates look poised to back up again.

Suddenly gold has lost its luster all over again.

Once the Fed is ready to ‘not just pause’, but actually cut policy rates, gold should shine anew. Until then? Investors may bide their time with copper and aluminum.

This year, green metals are under the golden spotlight.  

Yang Zijian, head of multi asset Asia Pacific
Allianz Global Investors

Yang Zijian

On the back of central banks’ hiking actions, real yields have risen to a higher level compared to the past five years.

Typically, real interest rates are a reliable indicator of gold prices, as rising real yields increase the opportunity cost of investing in non-interest-bearing assets such as gold.

As a result, gold would face headwinds in such an environment.

Looking forward, for the reasons mentioned above, we would take a tactical neutral stance on gold currently.

Structurally, however, from a multi-asset investing perspective, it is still beneficial to include gold as part of a diversified portfolio.

Gold has historically been a good hedge against inflation and market uncertainty, making it an attractive option for investors looking to mitigate risks.

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