As was the case in 2024, gold and, more generally, precious metals continue to be a star asset. In fact, gold prices have risen by more than 7% (in euros). This means their prices have jumped over 47% and 37% respectively since the end of 2023!
In March, the ounce of gold price broke through the symbolic and historic barrier of USD 3,000 (or nearly 2,750 euros). This means that a 10-kilo gold bar is now worth almost one million dollars, or 1,000 iPhones or 4 Lamborghini Urus!
Gold's ability to outperform the stock market (an ounce of this precious metal has outperformed the MSCI World Index, surging by almost 30% since the end of 2023!) can be attributed to a combination of several factors.
"}},{"componentType":"sectionTitle","title":"The impact of inflation and interest rates"},{"componentType":"paragraph","richBody":{"value":"The pandemic has made investors aware again that this precious metal offers good protection in times of economic instability. Following the COVID lockdowns and the global sudden stop, gold snatched the opportunity to blow past the USD 2,000/ounce barrier in August 2020, for the first time in its history.
"}},{"componentType":"paragraph","richBody":{"value":"Gold has also benefited from another of its strengths: its role as a safe haven in times of inflation. As a result of the very sharp drop in central bank interest rates and massive government spending to support businesses and consumers during the pandemic, the economy got a boost again when the restrictions were lifted.
The uptick was such that businesses and supply chains, which had been severely disrupted during the confinement, were unable to meet demand.
The war in Ukraine and the conflict in the Middle East have also caused inflation to rise sharply in 2021 and 2022. These conflicts have led to a sharp rise in energy prices, as well as in the prices of goods that require energy and fuel to produce and transport.
Inflation increased at such a fast rate that it reached a 40-year high!
Even though inflation has eased in 2024 because of central bank rate hikes and the rebalancing of supply and demand, the prices of many products and commodities have not returned to their pre-pandemic levels and probably never will! This situation is thus still a fertile ground for gold.
Even more so given that the return of Donald Trump to the White House and the Republicans in Congress, whose programme essentially aims to lower taxes, increase import duties, deregulate and curb illegal immigration, raises the prospect of new inflationary pressures.
"},"title":"The role of inflation"},{"alignedImage":{"position":"bottom","extension":"jpg","original":"https://assets.ing.com/m/5ae2ceaf5543207e/original/Graph-OR-1-627x336.jpg","transformBaseUrl":"https://assets.ing.com/transform/ac7ed42a-72b5-43b3-8276-9b9d40ce5ebd/Graph-OR-1-627x336"},"componentType":"paragraph","richBody":{"value":"Gold is also strongly influenced by interest rate movements. When the markets anticipate a cycle of rate cuts by central banks and take action, gold surges. (see visual)
For the first time in more than four years, the U.S. central bank (the Federal Reserve) had cut its key interest rate three times by the end of last year (from 5.5% to 4.5%) and is expected to bring it back below 4% by the end of 2025.
With seven of the top ten central banks currently engaged in a monetary easing cycle, gold’s attraction as an asset is understandable. As gold does not pay interest or dividends, it has less competition from bonds and equities.
"},"title":"Changes in interest rates"},{"componentType":"sectionTitle","title":"Protection in an increasingly fractured and indebted world"},{"componentType":"paragraph","richBody":{"value":"Persisting geopolitical tensions due to the increasingly visible rifts between democracies and authoritarian regimes and to several armed conflicts (in Ukraine and the Middle East) are also beneficial for gold.
"}},{"componentType":"paragraph","richBody":{"value":"Gold makes it easier to circumvent any sanctions and asset freezes that may be imposed on the various warring parties.
The decision by the West to impose sanctions on Russia after the start of the war in Ukraine, by freezing the Russian central bank's reserves held abroad by other monetary institutions, had a direct impact on the rouble and the dollar.
By prohibiting the Russian central bank from dipping into this war chest, the Americans and Europeans wanted to prevent it from defending the rouble if Russia faced an economic and financial crisis. Russia has finally managed to circumvent these sanctions and stabilise its currency. This highlighted the need for many treasurers to buy gold to diversify their foreign exchange reserves.
If a country's reserves that are held abroad can be withheld due to sanctions, this means that their security can no longer be guaranteed. A risk that has given many countries pause for thought. Emerging markets in particular: after the Asian financial crisis of 1997-1998, many governments decided to increase their dollar reserves so that they could defend their currencies by selling dollars in the event of a crisis.
To escape U.S. influence and reduce their reliance on the dollar, they are now turning to gold again.
In addition, many developing countries are facing a debt crisis that is jeopardising the financing of their public policies and undermining the safe-haven status of their government bonds.
These governments may therefore be tempted to pursue more inflationary policies, as inflation reduces the real value of a borrower’s debt burden. We know that if deflation occurs, it will lead to an increase in debt until it becomes unbearable. As mentioned, inflation, by contrast, has a major impact on gold prices.
"},"title":"Gold, a way to evade sanctions"},{"alignedImage":{"position":"bottom","extension":"jpg","original":"https://assets.ing.com/m/4c02b51b6b11ed9/original/Graph-OR-2.jpg","transformBaseUrl":"https://assets.ing.com/transform/72a76e7a-aefd-41c6-b803-d9ffd707f225/Graph-OR-2"},"componentType":"paragraph","richBody":{"value":"Considering all the above, many investors are turning to gold, including central banks, several of whom have increased their gold purchases sharply in recent years. Many of them, especially among the BRICS (Brazil, Russia, India, China and South Africa), want to reduce the U.S. dollar’s share of their foreign exchange reserves.
In 2022, 2023 and 2024, central banks bought 1,082, 1,037 and 1,030 tonnes of gold respectively - unprecedented volumes! With annual gold production hovering around 2,000 tonnes, it is easy to see how enormous the impact of central banks is on the market.
The appetite is such that if gold was a currency, it would account for 20% of all central bankers' foreign exchange reserves, just after the U.S. dollar (almost 60%) and on par with the euro (20%).
The case of China's central bank
Among central banks with the greatest hunger for gold, the Bank of China clearly stands out, with purchases of more than 310 tonnes since 2022.
The central banks of India (nearly 200 tonnes) and Turkey (100 tonnes) are also very active. China has reportedly increased its gold holdings from 1.8% of its total reserves in 2015 to just under 5% today. Given that the gold holdings of central banks account for 16% on average of their total reserves, it is fair to say that China’s impact on gold prices will continue for some time.
Even more given that the geopolitical and trade tensions between Beijing and Washington are not going away any time soon. China currently holds nearly 2,262 tonnes of gold, worth approx. USD 220 billion. If it decided to double the amount of gold in its vaults, its purchases would amount to an additional USD 220 billion at current prices, which would have a significant leverage effect on gold prices.
"},"title":"Central banks in the driver's seat"},{"componentType":"paragraph","richBody":{"value":"Central banks are not alone in diversifying their assets. Demand for gold for investment purposes also remains bullish, exceeding 1,000 tonnes a year.
Hedge funds have been very active, almost tripling their ‘long’ positions in gold (i.e., those that bet on a rise in gold prices through the options and futures markets) since mid-February 2024.
ETFs (trackers) backed by physical gold saw their total assets increase by 9% over the same period, a sign that private investors are also aware of the benefits of having gold in their portfolio. Given that total assets are 20% lower than in 2022, there is further potential for gold prices to rise.
Finally, the over-the-counter (OTC) market is also booming, with gold purchases on these markets (460 tonnes) surging by 753% last year, according to the World Gold Council.
Contrary to Keynes’ idea, gold is no longer a ‘barbaric relic’! The outperformance of this precious metal shows that it has its place in a diversified portfolio. Given the explosion in budget deficits and government debt, the huge investment needed to make the transition to a low carbon world, and the unstable geopolitical environment, gold remains the ultimate safe haven more than ever!
Reason why ING fund managers continue to include it in their asset allocation.