Gold Continues to Shine: A Surprising Rise in 2023
In a world dominated by cryptocurrencies and AI stocks, it is surprising to see investors’ continued interest in the oldest commodity: gold. Closing at an all-time high in December, gold prices nearly reached $2,100 per ounce, growing 15% in 2023. This impressive performance defied traditional economic theory, which predicted only a 2% return on gold.
One of the most important factors impacting gold prices is real interest rates, which represent the opportunity cost of holding yield-free bullion. Despite interest rates being at their highest in decades, gold prices have skyrocketed, raising questions about the supposed inverse relationship between interest rates and gold prices.
Fergal O’Connor, a senior lecturer in financial economics at University College Cork and expert advisor to the World Gold Council, expressed surprise at gold’s performance in the face of increasing interest rates. He expected gold prices to decline under the current circumstances, but instead, gold held above $2,000.
Inflation, another factor traditionally linked to gold demand, has also fallen dramatically. However, this has not dampened the appetite for gold. In fact, central banks, which play a crucial role in influencing gold prices, have been buying gold at an unprecedented rate. Over the past two years, central banks have bought over 1,000 tonnes of gold, significantly more than the average of 200 to 300 tonnes.
The Central Bank of Ireland is one such example, doubling its gold reserves from six metric tonnes to 12 in 2022. According to findings from the World Gold Council, the three leading factors driving central banks’ decision to increase gold holdings are interest rate levels, inflation concerns, and geopolitical risks. Additionally, 70% of banks surveyed believe that gold reserves will continue to rise in the next 12 months.
However, central banks account for only 15% of total global gold ownership. The majority of gold demand comes from consumers who buy gold for adornment purposes. Despite its lack of intrinsic financial value, gold’s importance stems from its historical association with central banks and its allure for ordinary people.
While short-term relationships between gold and interest rates may have proven futile, annual jewelry consumption remained steady throughout 2023. The recovering Chinese economy and the growing Indian market were key drivers of gold demand.
Looking ahead to 2024, the World Gold Council predicts that central banks will continue buying gold at a significant rate. Additionally, interest rates are expected to decrease, providing further support for gold prices.
In conclusion, despite the high interest rates and diminishing inflationary pressures, gold prices have surged due to central bank buying and steady consumer demand. The allure of gold as a tangible, historically valuable asset remains strong. As the year progresses, it will be interesting to see how these factors continue to shape the price of gold.
