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Gold rush persists as economy lags

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By Charbel Kadib
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4 minute read

Central banks have continued to increase their gold holdings, fuelling speculation of a rebound ahead of a global economic slowdown.

According to new research from the World Gold Council, central banks added approximately 77 tonnes of gold to their reserves over the month of August, up 38 per cent from July.

In just three months, net gold purchases from central banks totalled 219 tonnes – replenishing a combined net decrease of 96 tonnes in April and May.

This has come amid growing uncertainty over the outlook for the global economy, particularly amid growing evidence of a prolonged slowdown in China.

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Indeed, the People’s Bank of China was among the largest investors in gold in recent months, adding 29 tonnes in August – 37 per cent of the cumulative increase.

In the year to date, China’s net purchases have totalled 155 tonnes, and has bought, on aggregate, a total of 217 tonnes since November 2022.

In this environment, investors are being encouraged to consider increasing their portfolio exposure to gold assets.

Arian Neiron, chief executive officer at VanEck Asia-Pacific, said the gold price may “test its all-time heights”.

“We think, in the face of a slowdown, gold should be considered as a part of a portfolio, and goldminers if you like value,” he said.

“Gold equities are trading at a discount relative to gold and they are at historically low multiples.”

Citing an analysis by Paradigm Capital, he said goldminers may be trading at a discount of up to 35 per cent relative to their 10-year historical average.

Mr Neiron said potential gold price rally could be underpinned by ongoing geopolitical tensions, expectations of a looming global recession partly induced by rate hikes, and easing headwinds from the US dollar.

“Looking ahead, it’s easier to see more risk events with geopolitical tensions likely to continue to escalate as countries choose sides between East and West,” he observed.

“Risks in financial markets remain notable the prospect of rates remaining elevated for an extended period. Gold’s appeal increases if the economy falls into recession.

“There is reason to believe too that the US dollar will be less of a headwind to gold.”

Central banks remain open to interest rate hikes to bring inflation back to their respective targets despite evidence of a marked contraction in economic activity.

In Australia, the Reserve Bank of Australia has paused its monetary policy tightening after 400 bps in cumulative tightening since May 2022.

However, the central bank remains open to lifting rates, adding it will continue to monitor local and international developments to assess progress towards the 2–3 per cent inflation target.

“Returning inflation to target within a reasonable timeframe remains the board’s priority,” the RBA noted in its latest post-meeting statement.

“High inflation makes life difficult for everyone and damages the functioning of the economy.”

However, many economists have called a permanent end to the tightening cycle, with some observers, including the Commonwealth Bank, forecasting cuts to the cash rate in 2024.

“We expect a gradual monetary policy easing cycle to get underway in May next year, progressively taking the cash rate down to a more neutral level,” CBA noted.

AMP Capital chief economist Shane Oliver agrees but expects easing to commence in June 2024.

“[Another] rate hike would be very high risk as economic data is already slowing and we remain of the view that the risk of a recession is already around 50 per cent,” he said in a recent macroeconomic analysis.

“…Our assessment remains that the RBA has done more than enough to control inflation and that rates have peaked ahead of rate cuts starting around June next year.”

Gold rush persists as economy lags

Central banks have continued to increase their gold holdings, fuelling speculation of a rebound ahead of a global economic slowdown.

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