Investors seek safety of gold after bank failures


Gold demand has soared in recent weeks as investors flee to safety as global and regional bank failures shock the financial system and volatility returns to share markets in a dramatic way.

Gold could surpass well over US$2000/ounce this year as its momentum builds and it becomes 'en vogue'.

The precious metal has forged ahead this year, gaining about 10.6% as at May 9, 2023, compared to a rise of around 7.9% for the S&P 500 and 4.6% for the S&P/ASX 200.

investors flock to gold

The gain in gold prices in Australian dollars is even greater; gold had gained 12.6% over the year to May 9, outpacing gains in the US dollar gold price, given that a depreciation in the local currency boosts returns from assets priced in US dollars.

Demand for gold is rising quickly as economic uncertainty and financial instability sweep through global financial markets on fears the US economy will fall into a recession and more banks may fail as interest rates rise, which eroded the value of bonds and shares last year and assets on banks' balance sheet.

With inflation still very high in developed economies and the odds increasing of a global recession, investors are very nervous about other back failures and stalling economic growth; many are piling into gold and bullion-backed exchange traded products (ETPs) to position their portfolios more defensively. We see nothing to stop that momentum this year, which could push up gold further.

Gold prices have historically flourished during times of economic uncertainty and when government debt levels are very high, as they are now. We believe gold should be included in every investor's portfolio as a reliable store of value, unlike shares or bonds, whose values are more vulnerable to panic selling, inflation and rising interest rates.

Gold has long been favoured as a stable, core portfolio holding due to being a store of value around the world. Many investors use gold as a hedge against inflation. With inflation likely to persist in 2023, this could keep pushing investors into the precious metal, and flows into gold-back ETFs could be maintained given strong demand for the precious metal.

It is also important to note that it isn't just retail and smaller investors that have flocked to gold as risks of global recession grow, but central banks, the most conservative investors of all.

Net purchases of gold by central banks in 2022 totalled 1136 tonnes, an increase of 152% on 2021 and by far the most of any year in records going back to 1950, according to the World Gold Council. Not only was 2022 the 13th consecutive year of net central bank gold purchases, but also the highest level of annual demand on record.

Looking ahead, the World Gold Council sees "little reason to doubt that central banks will remain positive towards gold and continue to be net purchasers in 2023" which will maintain upward pressure on the gold price, along with buying by retail and institutional investors. Elevated recession risks will likely sustain interest in gold, giving it upside potential as 2023 progresses.

Given buying gold bullion isn't convenient for most investors, an investment in a gold ETP is effectively an indirect investment in gold bullion in a more convenient and accessible form. An ETP avoids the need for investors to personally store the bullion in a vault or to buy a whole bar of gold, which few retail investors can afford.

As with all investments, there are some potential risks worth considering before investing in gold - mainly market risk, commodity price risk and capital loss. It is also important to remember that past performance does not guarantee future performance.

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Blair Hannon joined Global X ETFs as head of investment strategy in March 2022. Prior to joining Global X ETFs, Blair served as NSW state manager at BlackRock, and as a Commonwealth Bank senior investment adviser. Blair holds a Bachelor of Finance from Newcastle University, an MBA from the Australian Graduate School of Management at the University of New South Wales and an Advanced Diploma of Financial Planning.