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Gold: More than meets the eye

May 16, 2024 | Richard Tan, CFA


In a conversation with RBC Capital Markets, LLC Commodity Strategist Christopher Louney, we look at aspects driving the gold rally and explain how world events and policy shifts could impact its prospects.

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Gold on a scale

Richard Tan: Gold prices have rallied significantly, leading to several new all-time highs this year. You’ve argued that strong central bank buying has been a key culprit. What percentage of global demand do these purchases account for, and is the pace sustainable in your view?

Christopher Louney: Gold prices have touched new highs year to date, largely on the back of strong central bank demand, high physical demand, strong interest in China, and geopolitical concerns. In 2022 and 2023, official sector demand for gold, which includes national central banks and similar institutions, surpassed 1000 tonnes, with China and Poland adding the most last year. This was nearly a quarter of global demand each year, and more than double the prior five-year average. Strong demand from central banks is sustainable, in our view. We forecast above-average demand this year and next. Year-to-date demand has been at least that strong, as central banks continue their efforts to diversify their holdings and, in some cases, de-dollarize—trends which currently show no sign of abating.

Historical price of gold
Historical price of gold

The line chart shows the price of gold, in U.S. dollars per ounce, from January 1, 2018 through May 14, 2024. Although the price of gold experienced fluctuations over the period shown, the overall trend is strongly upward. The price increased from roughly $1300 to roughly $2300 currently, its highest level for the time period.

Source - Bloomberg

How does geopolitical risk factor into gold prices?

Geopolitics factor into gold as do most crises generally, largely stemming from gold’s role as a perceived safe haven. This reputation is a key part of its identity and perceived value among investors—up there with its history, low correlations with other financial assets, diversification benefits, liquidity in times of crisis, etc. In fact, many of these ideas are intertwined. In a world where we are seemingly just moving from one crisis to the next, this makes gold interesting to many. While we think gold’s reputation and attractions are deserved, the gold picture is more nuanced than many people believe. Gold’s performance is consistent in the short term whether in reaction to a geopolitical or an economic crisis but differs in the long term. In the very short term, it tends to perform regardless of the type of crisis, but as near out as one month and beyond, performance can become more mixed. For gold to hold on to geopolitical gains, there usually needs to be some sort of economic fallout. With wars ongoing in the Middle East and in Europe, there is a near-term geopolitical bid that the market is pricing in. That said, markets appear to be looking for a retracement in the Middle East and European geopolitical risks, in our view, understandably eager for an offramp, making these gains vulnerable over the long term. This risk impact on the gold price can endure while the crisis rages on, but to remain beyond that would require other catalysts.

Many consumers and businesses continue to battle the effects of inflation and higher interest rates. What’s your assessment of demand from the real economy?

Gold has a reputation as a hedge against inflation and a store of value. While there are alternatives explicitly designed to hedge against inflation and there are even other commodities which themselves are components of headline inflation, over the very long term, gold can store value. However, gold’s ability to hedge all types of inflation on a consistent basis is mixed. We think of gold as a good hedge against surprise, extremely high, and monetary-driven inflation. Thus, when inflationary fears are running high, physical gold tends to get quite a bit of attention, something we have seen play out recently. Today, there does seem to be strong demand from gold consumers, initially led by China but now globally, to hedge against inflation (and for a host of other reasons). We think inflation data is perhaps more telling in how it impacts the Fed’s decision making around monetary policy. So, in our eyes, gold investors should watch inflation more for what it means for interest rates, rather than just for inflation itself.

How do you think supply growth will unfold in the coming years?

Total gold production can still manage some gains both in 2024 and in 2025, in our view, but it is important to remember that annual gold production simply adds to above-ground stocks each year. In fact, the best estimates point to more than 200,000 tonnes of gold having been mined throughout history, almost all of which is believed to still be around in one form or another. Thus, while gold production can continue to grow before peak supply becomes a headline, it is still simply added to above-ground stocks. On an annual basis, perhaps more interesting this year will be scrap supplies, as holders sell their existing gold jewelry and other fabricated pieces given high prices. We expect sales from this source to be elevated this year in response to new high ground for the gold price.

What is the biggest source of vulnerability for gold, in your view?

The available evidence points to continued strong interest from central banks and from China. There are also signs of growing physical interest in the U.S. However, these are not usually the most price-predictive parts of our analysis, nor is data the most timely. It is important to stress here that these are relevant factors for gold, but rarely in recent times have they been the overriding drivers of price or the most predictive parts of valuation models on a sustained basis. Gold models often rely much more on macro drivers such as interest rates (which remain high, elevating the opportunity cost of holding gold), the dollar (which remains strong) and other factors. By most of those measures, gold is actually quite overvalued. But even when using a blended price model like ours for example, gold still looks overvalued versus our high-estimate scenario. Perhaps this is a signal to readjust our expectations. Or perhaps the potential downward pressure indicated by macro drivers is just not important right now. We certainly may be wrong, and central bank and physical demand really can push gold prices even higher before an eventual interest rate cut arrives, but given the lack of investor follow-through (exchange-traded funds flows everywhere but Asia remain squarely negative), we still think there are vulnerabilities yet to be realized in gold.

Gold prices have pushed past your Q2 2024 high scenario forecast of US$2,282 per ounce. What is required in your view for gold to retrace back to your Q2 2024 middle scenario of US$2,068 per ounce? What is your outlook for the back half of 2024 and into 2025?

We still think that gold prices have gotten ahead of themselves, but there are important factors driving gold prices so high. While we point to our high scenario as the most likely, as current prices have outpaced even that, we question whether central bank demand headlines and strong physical demand alone can overwhelm macro factors permanently, which as noted above, point to lower prices. Additionally, we still see a lack of investor follow-through on this move almost everywhere except for Asia (ETF outflows continue). There are plenty of reasons why gold prices have been strong, but we urge market participants to not ignore the fact that gold prices are currently dislocated from most pure macro valuations, even if returning to our middle scenario prices is unlikely this year. In 2025, our high-scenario forecast is US$2,394 per ounce, which provides context to just how far ahead of itself gold may have gotten, in our view.

The near-term DRIVERS framework




Negative - Mild

The U.S. dollar strengthened since the start of this year on average. This should be gold negative but that has yet to be realized this year.




Negative - Mild

Rates have also risen on average since the start of the year, which should be gold negative, although gold has continued to realize new highs so far.




Negative - Mild

We remain of the view that gold is not the inflation hedge many think. But persistent inflation is impacting the Fed. This should be mildly negative for gold.


Volatility & equities


Negative - Mild

Volatility doesn’t appear to be a significant driver, but pricing patterns versus equities indicate gold may be trading as a risk asset, in contrast to physical indicators.


ETFs & investor flows


Negative - Strong

Flows remain extremely poor with 2024 seeing additional outflows. We think this should be more of a drag on gold unless it turns for the better.




Positive - Strong

Headlines about strong central bank interest are one of the key drivers judging by recent headlines and price outcomes. This is real, but there are other drivers, too.


Supply & demand


Positive - Strong

Supply seems to be a non-issue in the current market, but physical demand looks like a strong driver based on current prices and relevant headlines.

The DRIVERS framework (Dollar; Rates; Inflation; Volatility & equities; ETFs & investor flows; Reserves; Supply & demand) ... and beyond

Based on the mix of drivers, their strength, and what we view as the most impactful drivers of the moment, we believe pressure on gold should be mildly negative in the short term (in line with our high-scenario price outlook and other scenarios). We think gold price strength has gotten ahead of itself on the back of physical interest and central bank demand, but the repricing of rate cut narrative and macro factors point to lower prices, in our view. We may be wrong here, but we think if we are, it is for the right reasons. If investors get behind this move with consistent inflows, our minds could be changed.

"Positive" and "Negative" indicate the direction of near-term pressure; minimal, mild, medium, or strong indicates the strength of the effect.

DRIVERS categories can change over time as gold is fickle and factors shift in importance and relevance from time to time.

Source - RBC Capital Markets estimates