Article by David Curmi
Gold has been on a tremendous upward run over recent years with interest in the shiny metal exploding over recent months, reaching a high of $5595 after opening 2025 at the level of $2626. It currently is hovering at just below $5000 per ounce.
Gold has always been viewed as a store of value, especially in times of upheaval yet it has not always been a great investment. Between January 1980 and January 2006, gold effectively flatlined closing at U$568 per ounce, with large drawdowns of 55% during the period. Thereafter gold oscillated with an upward tendency to around the end of 2023 when suddenly it burst into life once again rising almost 250% in 2 years, accelerating to a peak a few weeks ago.
The main drivers that appear to be influencing the price action can be categorised into 4 main areas:
Central bank demand – This has remained relatively constant but has been increasing in recent years with Central Banks such as the People’s Bank of China (PBOC), continuing to diversify away from direct holding of USD and increasing its gold reserves.
Geopolitical risks – Various geopolitical events in recent years have increased the level of global concern on the current world order. Events in Ukraine, Iran, China-Taiwan, Greenland and more recently Venezuela amongst others show that risks of disruption to world peace are growing.
Sovereign debasement – Concerns about debt levels, especially in the US, have driven discussions on the future of the USD as the world’s reserve currency. Federal Reserve independence was also being questioned recently.
Artificial Intelligence (AI) – The impact of how AI develops is yet to be fully understood with a variety of potential scenarios being discussed, some rather disruptive. This uncertainty is driving investors to consider hedging their outlook.
These factors have all had the impact of driving the demand for gold higher. Demand for gold normally comes from three main sources, namely central bank reserves, industrial demand and retail/investor demand. Central bank buying has been an important, and growing element, shifting materially in 2023, with industrial demand also increasing. It is however retail and investor demand that has driven prices higher over the last 12 to 18 months. Against this backdrop supply for gold is relatively limited and inelastic. Mining of gold, and hence its supply has not changed materially in recent years.
The big story is therefore the level of investor demand. Household capital allocations to gold have shifted in recent years, especially in China and India. Similarly in the Western world, investor demand has ballooned, partially as a result of momentum trades but there has also been a structural shift in the way investment portfolios are being structured. Currently gold currently makes up 4.1% of total household wealth according to Citi Research – a division of Citi Global markets. Some large investment banks have advocated much larger capital allocations to gold in portfolios – as high as 20% in some cases. The issue is that the gold market is too small, and its supply too inelastic to handle big shifts in capital allocations. Citi Research estimate that at present total gold supply is equivalent to 0.1% of total household wealth. A shift in household wealth from the 4.1% to the 5% level would swallow up 11 years of mine supply. The impact this could have on the price of gold is easy to visualise in such scenarios, but how realistic is this?
Certainly risks, both economic and political, remain elevated and are likely to remain so. However these risks may not be ever present and hence one can assume that as these risks diminish demand for gold should also subside. A case in point is the selection of Kevin Warsh as nominee to replace Jerome Powell as chair of the Federal Reserve. Mr Warsh is seen much more as a moderate, compared to the previously indicated nominee for this post, and thus more likely to preserve the independence of the Fed. Following his selection, gold and silver, prices moved sharply lower. In a tight market price movements are likely to be exacerbated.
The next move depends therefore on how the risk map plays out. The US is a primary mover in this respect and Donald Trump continues to upset the status quo, hence elevated risks will remain. As we approach the mid term elections his tendency to create more upheaval will likely diminish but some of the issues are structural and may take some years to play out and in this scenario holding some gold as part of a structured portfolio strategy may not be a bad thing.
David Curmi is chief officer, business development and client relationships, at Curmi & Partners Ltd.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business. Curmi & Partners Ltd, with registered address Finance House, Princess Elizabeth Street, Ta Xbiex, Malta XBX 1102, is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.