Gold prices have been on a strong upward trend recently, with people buying for various reasons. Physical gold, in particular, has seen significant demand. But with the price so high, there are questions about whether this will deter further interest. Will we see any catalysts driving prices from here?
According to experts, it’s an interesting time for gold. To understand its future, it’s crucial to look at the global demand dynamics, which have mostly been driven by Eastern investors and central banks. However, a weakening dollar and lower real interest rates could shift interest to Western investors, who have been on the sidelines. This shift suggests a strong environment for gold at current levels, with a likelihood that prices will continue to rise.
The dollar’s decline is part of a broader trend. But why are people buying gold right now? There are several motivations. First, gold offers a diversification benefit. It acts as a store of value when risk assets decline. Second, it provides liquidity, and third, it generates returns in a way that makes it a valuable diversifying asset for portfolios, particularly for central banks looking to hedge against a weakening dollar and fiscal uncertainties. Gold remains a liquid asset that can easily be sold or acquired, offering real diversification and portfolio strength. Adding gold to a diversified portfolio can enhance risk-adjusted returns.
The current fiscal challenges facing countries like the U.S., France, and Germany are also driving demand for gold. As these issues persist, gold could be a slow-moving catalyst over the next several months. While we may not see sharp movements in prices, Western investors are expected to gradually increase their gold allocations. Despite potential volatility, it’s unlikely that minor rate cuts in Western markets will have a significant impact on gold prices. Instead, the shift towards gold will be strategic and slow.
In Europe, for example, ETF inflows into gold have been substantial over the past six months. While Western investors are slowly adding gold to their portfolios, it’s not just them. Gulf asset managers and investors are also looking to gold as a diversification and safety trade. Interestingly, the ETF trade, once seen as the primary way to invest in gold, seems to have quieted down, with many turning to more physical forms of gold investment.
There are several reasons for this shift. The Western market has traditionally favored ETFs, but these make up only a small portion of the total investment market for gold. Eastern investors, on the other hand, prefer to own physical gold, which is a more familiar and common investment choice for them. While ETF flows are slowly returning, particularly in Asia, the majority of gold investment happens in the over-the-counter market, where large bars, kilo bars, and coins are the preferred instruments. Many investors feel confident owning gold in these forms, as it allows for straightforward transactions.
Gold demand has been strong, particularly among Eastern investors and central banks. Factors such as a potential U.S. rate cut and a weakening dollar could now increase demand from Western investors, leading to changes in the market dynamics.
The primary reasons for investing in gold include its benefits for diversification, its status as a safe-haven asset during market sell-offs, and the liquidity it offers. These factors have made gold appealing to both central banks and investors, especially in light of fiscal concerns.
Western investors are gradually shifting toward gold due to global economic uncertainties. However, gold price movements are expected to be steady rather than rapid, with some volatility anticipated.
There has been a noticeable shift from gold ETFs to physical gold purchases, especially among Gulf asset managers. While ETFs still make up a small portion of the gold market, demand for physical gold has increased, particularly in Eastern markets.
Even though ETF activity in Western markets has slowed, inflows in Asia have risen. Still, the majority of gold investments remain in the OTC market, with a focus on physical forms like bars and coins.