Herman van Papendorp, Head of Investment Research & Asset Allocation
US real rates have been the dominant driver for the US dollar gold price for a couple of decades, as the fundamental driver for gold is the opportunity cost of holding a non-interest-bearing asset. However, this relationship has broken down since the Russia/Ukraine war – we estimate that non-Treasury Inflation-Protected Securities (TIPS) factors are adding more than $1,200/oz to the current gold price.
This is likely due to the highest-ever gold buying from global central banks in 2022 (see chart 1), probably for geopolitical and diversification reasons. Central banks have an affinity for gold reserves as it is deemed a safe haven in risk-off periods and does not rely on any issuer or government, unlike currencies and bonds.
Chart 1: Central bank gold buying highest ever in 2022
Source: Refinitiv, World Gold Council
Gold also enables central banks to diversify their reserves away from assets like US Treasuries and the dollar, particularly for countries wary of future confiscation of their international US dollar reserves should the US decide to impose Russia-like sanctions on them. Banks including those of Türkiye, China, Egypt and Qatar said they bought gold last year. But around two-thirds of the gold bought by central banks last year was not reported publicly, according to the World Gold Council (WGC).
The strong central bank buying trend has continued this year, with central bank buying in the first half of 2023 the highest on record (dominated by China, Singapore and Poland), despite the substantial 130 tonnes of gold sales by Türkiye in the second quarter of this year.
With geopolitical strife likely to remain high in coming years as deglobalisation continues and a multipolar world order establishes itself (between the West and China), gold is likely to maintain its strategic attractiveness in investment portfolios as a hedge against political volatility and uncertainty. This is already borne out by results from a recent WGC survey where 71% of 57 global central banks indicated that their gold reserves will likely increase in the next 12 months.
Chart 2: Gold has limited correlation with other asset classes
Source: Iress, Bloomberg, Momentum Investments
This will likely maintain the strategic rationale for gold as a portfolio risk diversifier, because it is expected to hold its value through turbulent times and has limited correlation with other asset classes (see chart 2). For a SA investor, the rand gold price has been a strong relative asset class performer historically, as perennial rand weakness has provided huge support over many years.