Less than a kilometer and a half from Singapore Changi Airport, in a business park surrounded by buildings dedicated to freight, logistics and offices, an austere building has been erected. It has latest generation security devices. Behind imposing steel doors, a billion dollars in gold can be stored there, not for the central bank, but on behalf of companies and individuals.
In Asia, demand for gold remains strong, contributing to soaring prices. In one year, prices have increased by almost 40%, with an ounce of gold now exceeding $2,700. Everything currently seems to benefit the precious metal: the pandemic, the war in Ukraine, inflation, tensions in the Middle East, trade tensions with China, the American election, etc.
Today, it’s not just conspiracy theorists who buy gold
Professional investors generally look down on precious metals because they do not generate income. According to Dirk Baur and Lai Hoang of the University of Western Australia, among US institutional investors with more than $100 million in assets, less than a quarter hold shares in index funds (ETFs) on the gold. Gold investors are often the most pessimistic investors, convinced of a fatal crash, the decline of the West or even the collapse of the world. They sometimes make exaggerated predictions to justify their purchases, such as an imminent US default or the introduction of a new gold-backed currency by China and Russia to supplant the dollar.
However, today it is not just conspiracy theorists who are buying gold. Family offices, whose assets under management increased from $3.3 trillion in 2019 to $5.5 trillion in 2024, are acquiring gold to diversify their portfolios and protect themselves against inflationary risk. More than two thirds of family offices have invested in gold in recent years.
The demand for gold comes largely from Asia. The real estate crisis in China has pushed savers to turn to the precious metal. China and India, which together represent a fifth of global economic output, are responsible for half of retail purchases of physical gold in 2023. Purchases of gold bars and coins in China have increased by 44% between June 2023 and June 2024.
Beyond individuals, the major players in the gold market remain the central banks. If the share of gold in their reserves had fallen for decades, going from almost 40% in 1970 to only 6% in 2008, it is on the rise again, reaching 11% in 2023, its highest level in twenty years.
Russia’s invasion of Ukraine and freezing of its foreign currency reserves was a turning point: reserve managers realized that U.S. Treasuries and other Western currency assets could be useless in the event of sanctions.
Since the start of 2022, the monetary authorities of China, Turkey and India have purchased 316, 198 and 95 tonnes of gold respectively, according to the World Gold Council. Central banks mainly accumulate physical gold and are often forced to keep it in their vaults to avoid seizure. Recently, the British government refused to transfer tens of tons of gold to Venezuela, failing to recognize Nicolás Maduro as a legitimate leader.
None of the 51 central banks surveyed plan to reduce their gold allocation in the next three years.
Gold purchases are not reserved for states in conflict with the West. Singapore’s central bank has acquired an additional 75 tonnes of gold since the start of 2022, while the National Bank of Poland has accumulated 167 tonnes, aiming for 20% of its reserves to be in gold. This metal remains a symbol of power and prosperity for States.
Central bank demand appears set to remain high: a 2024 survey of sovereign investors by Invesco Asset Management found that none of the 51 central banks surveyed plan to reduce their gold allocation in the next three years, while that 37% plan to increase it.
Among central bankers, around 56% believe that gold protects against “ militarization » reserves by Western states, and 70% consider it a hedge against inflation. Central banks invest in gold not for an immediate return, but to protect themselves against geopolitical and economic risks. Today, the link between interest rates and gold prices is weaker than before. Gold no longer falls when rates rise, due to precautionary buying.
Gold does not know the crisis
Despite this, demand for gold ETFs increases when rates fall: typically, a quarter of a percentage point rate cut causes gold ETF holdings to increase by 60 tonnes (currently $5 billion) in gold ETFs. six months following. For Warren Buffett, gold “ feeds on fear and the belief that it will spreadr”. It seems that many investors have concerns for the years to come.
A safe haven, a diversification asset, gold is not in crisis. On the one hand, central banks continue to accumulate gold in response to geopolitical and financial risks, on the other hand, individuals, especially in Asia, are supporting demand. The multiplication of uncertainties favors the increase in the price of gold as, more cyclically, the fall in interest rates.
Over the past ten years, the price of gold has been increasingly indifferent to cycles. Almost everything works in favor of the appreciation of the precious metal but, as with stocks, “ trees don’t rise to the sky ».
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