Consensus says the price of gold will rise again in 2024, extending last year's new all-time highs as Western central banks cut interest rates, emerging-market central banks keep buying record quantities of bullion, and geopolitical tensions risk flips into outright conflict between major powers.
While those assumptions feel all-too plausible as the global economy slows and Donald Trump runs for the White House again, gold's 70% gains over the past half-decade do face some challenges – not least from its truly remarkable performance in 2023.
First, gold rose last year even as real interest rates rose at the fastest pace since at least 1950. This is remarkable because, as a non-yielding asset, gold typically loses value when interest rates rise, most especially when cash-in-the-bank pays a sharply higher rate of return relative to the pace of inflation.
On an annual average basis, 2023 saw the US Federal Reserve's key interest rate jump by a massive 7 percentage points once you account for inflation. That's steeper even than the real-rate hike of 1981, imposed to kill the prior decade's double-digit inflation at the cost of a deep economic recession.
That year's jump of 6 percentage points in real US interest rates saw the value of gold bullion plunge by 32% from what remains a modern-era record, the heaviest ever real terms loss on BullionVault's analysis of 100 years of historical data. Yet in 2023, in contrast, the real price of gold actually rose, adding more than 3% on an annual average basis.
How did gold overpower the kryptonite of steeply higher real rates? Supported by household demand for jewellery, small bars and coins, the price of gold most often shows a strong, positive correlation with the level of private-sector investment demand.
But in 2023, private inflows to gold bullion were crushed by record high nominal gold prices plus the highest interest rates in two decades. Germany's coin and small-bar purchases, for example, sank by 80% net of investor selling, while the total size of gold ETPs listed in Europe shrank by nearly 11%.
So who was buying? Central banks. The net increase in official-sector holdings weighed nearly twice the overall drop in private investment purchases worldwide on estimates published by the mining industry's World Gold Council.
Indeed, central-bank demand last year equalled almost one-third of new global mine supply, the highest proportion since 1963 – back when gold bullion backed the global monetary system under the post-world war two Bretton Woods agreement.
Private investing, in contrast, fell in 2023 to just 25% of new mine supply. Less than half the level of 2020's Covid shock, that was the lowest proportion since 2013, when gold prices sank in the precious metal's worst crash since that plunge of the early 1980s.
Private capital, in other words, has responded to gold's new all-time record high prices like it's actually crashing, while central banks are buying gold like it has returned as the lynchpin of the global monetary system.
Central-bank gold demand in 2023 was even more remarkable when valued as a proportion of global GDP, rising to 0.07% across the last 12 months – just topping the level of 2022 as the highest share of economic resources since at least 1960.
Leading this surge are emerging-market central banks, with the People's Bank of China widely suspected of buying far more gold bullion than the strong purchases it chooses to report in public.
The reasons centre on 'de-dollarization' – a move to reduce the US currency's dominance both in official-sector reserves and in international trade, most especially after Russia was cut off from accessing Western financial markets by US-EU sanctions following president Vladimir Putin's all-out invasion of Ukraine.
Such tensions – best summarized as 'the West versus the rest' – might not see central-bank gold demand repeat or beat this year's remarkable impact on bullion prices in 2024. But they look likely to sustain further accumulation for years to come, supporting if not driving the precious metal still higher.
Traders and central banks lack a clear replacement for the dollar among the world's other currencies, and that makes physical gold shine as a reserve asset. No one's liability, gold is no one's to control. Even now, 50 years after it was officially cut out of the global monetary system, gold still represents the ultimate form of payment.
Less certain is the short-term outlook for private-sector gold investing. With gold's uptrend forecast to continue in 2024, demand is likely to rally as the Fed leads Europe in starting to cut interest rates. But a more marked rebound will probably need fresh urgency from a geopolitical, economic or financial shock.
Whether 2024 delivers on that bleak promise, the vast majority of current gold owners will continue to hold bullion as investment insurance, a long-term hedge against instability, debasement and unforeseen crises.
Adrian Ash is director of research at BullionVault. The views expressed above should not be taken as investment advice.