Macro Perspective 46 | Gold proves to be resilient

In this macro perspective episode, Peter Brooke discusses the surprising performance of gold this year – proving its resilience. Despite a strong dollar and rising interest rates, physical gold has delivered a 7% return in US dollars and an impressive 18% return for South African investors due to the weak rand. In the short term, gold serves as a protective asset against a slowing world economy and geopolitical risks, which could be good news for South African equities, where gold shares constitute 7.5% of the market.

For a deeper understanding of the factors influencing gold's performance and its implications for investors, tune in to the full podcast. 

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Transcript

Good day, I'm Peter Brooke, a portfolio manager at the Old Mutual Investment Group. This is macro perspective 46 of 2023 and I want to talk about gold. 

Physical gold has delivered a return of 7% in US dollars year to date, which is better than bonds, cash and commodities. For South African investors, this is an even better 18% return due to our weak grand. I think this is a surprisingly good result considering the fact that the dollar has been strong and interest rates have risen a lot. With US cash yields of five and a half percent, the opportunity cost of holding gold, which has got no yield, is much higher. Tina or there are no alternatives have been replaced with lots of alternatives. Investment professionals know this, which is why they've been big sellers of gold. Year to date gold ETF holdings, just ETFs, are exchange traded funds have been cut by 225 tons or $13 billion. 

Interestingly, the only place in the world offsetting this has been Asia, where ETFs in Asia have bought 15 tons or $1 billion. This makes sense in the context of low interest rates in Asia and also weaker currencies making physical gold a much better investment. For instance, Japanese investors have made 23% on their gold investments and less than 1% on Japanese cash in the bank. 

Now the mystery of how gold can go up despite big selling can be easily solved. During the same period, central banks have been big buyers, compensating for the ETF selling. The biggest buyer year to date has been China with 181 tons, almost single-handedly balancing the investment selling. But they've been supported by India, Libya, Poland, and Singapore with chunky purchases. This is not surprising in the context of our multipolar world and if we look at the data for the last 20 years or so, China has bought 1700 tons of gold, while the US has been basically flat. 

During the same time, the Chinese have stopped buying US Treasuries. Over the last decade, Chinese holdings of US Treasuries have shrunk from $1.3 trillion to a mere 800 billion, a decrease of 500 billion. 

For me, the interesting question is what happens in the future? We broadly expect a world where the US dollar is weaker and interest rates should fall from the current high ash levels. Now do those same financial buyers want their gold back? Because I suspect the Chinese government are not sellers and that would push the price up. 

Now every team has got a gold bill and ours is my colleague, Zane Wilson. He argues that the secular or the long-term outlook is positive due to multipolarity and the ongoing debasement of the US dollar through large fiscal deficits while on a more short-term basis or cyclical period, gold provides protection from a slower world economy and geopolitical risk. This would be a little bit of good news for South African equities, where gold shares are still seven and a half percent of our market. I hope you found this perspective useful. Until next week. Bye.