Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: This podcast was recorded for publication on the 9th of May 2024 by HSBC Global Research.
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Speaker: Hello and welcome to the Macro Brief, this week coming to you from New York.
Speaker: I'm your host, Aline Van Dyne.
Speaker: Gold has been shining brightly, one of the best performing assets this year.
Speaker: Prices recently hit new highs and remain well above $2,000 per ounce.
Speaker: Gold's strong performance is quite unexpected given the macro backdrop.
Speaker: Usually a strong dollar is correlated with weaker gold, as are higher interest rates.
Speaker: So what explains its resilience?
Speaker: I'm joined by Jim Steele, our chief precious metals analyst and a veteran gold watcher.
Speaker: Jim, what are the factors propelling gold higher?
Speaker: Well, I think we have a couple of new participants in the market and some new reasons.
Speaker: First of all, geopolitical risks are quite high.
Speaker: And although they're not as high as they have been at certain points historically, they're certainly higher than they have been over the average for the past 15 years.
Speaker: And both the IMF and the World Bank have alluded to this.
Speaker: And geopolitical risks basically means that the world is becoming less safe than previously.
Speaker: And that's looking for a safe haven.
Speaker: And gold as a hard asset is a natural choice in something like that because as geopolitical risks arise, you wouldn't know which currency you would want to be in.
Speaker: So a hard asset like gold, which is fungible and exchangeable, will top everybody's list.
Speaker: In addition, we all know that the equity markets have also been at new highs.
Speaker: And like a lot of gold analysts, there's the loss of explanation.
Speaker: So we do know that portfolio managers, insurance companies, asset managers, etc.
Speaker: have to be in the equity markets.
Speaker: But they do have a choice about if they hedge.
Speaker: And again, for very similar reasons to geopolitical risk, gold is a hard asset.
Speaker: It moves inversely with paper markets.
Speaker: And that's been proven time and time again.
Speaker: There's a lot of academic work on that.
Speaker: So these two things together, I think, are out of the normal for gold.
Speaker: And they pushed the market up to around $2,000, as you said.
Speaker: And at that point, a lot of technical momentum traders have come in receiving very strong buy signals.
Speaker: And that's taken us up to these highs.
Speaker: When you look back at gold over the last few decades, is this a particularly unusual and a particularly volatile time?
Speaker: Or is this usual for the gold market?
Speaker: Well, there's always a reasonable amount of volatility in the gold market.
Speaker: But we've really seen these highs, I think, have come in particularly since the beginning of the year.
Speaker: They've been really quite extraordinary.
Speaker: Because generally, and we are seeing it, but it hasn't had the impact on the market.
Speaker: At these prices, you know, one can expect some deterioration in underlying physical demand.
Speaker: For example, India and China consume 50% of all the physical gold in the market in the world.
Speaker: And a 10-gram bar, which is the favorite bar in India, is now over 71,000 rupees.
Speaker: And just not too long ago, it was 35,000.
Speaker: So also considering that many gold buyers in India and in the non-OECD world in general have limited incomes, you can understand that a lot of people are being priced out of the gold market right now.
Speaker: We're seeing that very clearly in demand for coins and bars.
Speaker: Many people in 2022, 2023 who wanted to buy a gold coin or a gold bar have probably already bought it.
Speaker: And we're seeing a decline in jewellery, declines in bars, declines in coins.
Speaker: And yet the market keeps going up.
Speaker: And that's because the investment side has been coming in, not so much the physical side.
Speaker: So let's talk about the buyers that are out there.
Speaker: You just mentioned that India and China are big buyers of China.
Speaker: actual gold for jewelry purposes, for gold bars.
Speaker: But what about the momentum buying?
Speaker: There's been some data recently that there's a lot of buying from Chinese investors.
Speaker: Is that fueling the rally more than it has previously?
Speaker: Yes, and it strikes me that these are large investors and not the only person that would buy a bar, a small coin or a small bar.
Speaker: The favorite bar in China is 50 grams or 100 grams.
Speaker: But property market is well down in China.
Speaker: Equity markets are well down.
Speaker: And I think that one of our economists said that about 70% of household wealth in China is tied up in real estate and those have declined.
Speaker: So if you do want to invest in something in China right now and you're looking to maybe escape almost the property market and the equity markets, gold has been the favorite.
Speaker: So by that analysis, when the property and equity markets stabilize in China, and I'm not saying they will do it this year, but when they do, I think we could expect gold to then become underfunded.
Speaker: What about central bank buying?
Speaker: Because that is something that you've mentioned over the last few years especially, and that continues to be strong.
Speaker: Has there been an increase there?
Speaker: And why would central banks want to buy gold anyway?
Speaker: Well, central bank activity in the market has been something short of phenomenal, but it certainly has been robust.
Speaker: In 2022, they bought more than 1,050 tons of gold.
Speaker: Now, that means that about one out of every three ounces of gold in the world that was mined went into a central bank vault and didn't come into the market, didn't go into somebody's finger, didn't go into a bar that was held by an ETF or anything like that.
Speaker: And they didn't do much less in 2023.
Speaker: Now, we think they'll do a little bit lower this year, maybe 800 tons or so, because the market is rather high.
Speaker: But there's a number of compelling things that would argue for central banks to keep buying.
Speaker: Firstly, geopolitical risks remain high.
Speaker: And so, like any other investor, a central bank would like to defray risk.
Speaker: The other one is that although we're certainly not in the de-dollarization camp and our view is that the U.S. dollar will remain the world's reserve currency for the foreseeable future for many, many reasons that go beyond this podcast, that's not to say that every single central bank would like to keep the level of dollars that they have now.
Speaker: You can go, for example, from 65% weighted in U.S. dollars and foreign exchange reserves down to, say, 63%.
Speaker: Now, the feeling that I'm getting is that central banks would like to de-weight their dollar holdings, or some central banks would like to de-weight their dollar holdings a little, but they're limited to what they can buy.
Speaker: And there's very good reasons that although they might want to be out of the dollar a little bit, there's very good reasons not to buy the euro and not to buy the yen, not to buy a sterling.
Speaker: swissi canada and australia dollars are too small markets so a great way actually of being out of the dollar but without going into another currency is to buy gold and that's what they're doing and in addition to the geopolitical risk element barry eichengreen a very good gold economist he's mentioned that some central banks would be tempted to buy gold in order to escape
Speaker: the repercussions of possible U.S. sanctions.
Speaker: Not saying that these central banks are under U.S. sanctions, but were they to come under U.S. sanctions, a great way of obviating those sanctions would be to own gold.
Speaker: So if you look at the currency argument, you look at the safe haven argument, and you look at the geopolitical argument, and the portfolio diversification argument,
Speaker: that all leads central banks to keep buying gold the other thing that alerted us to them buying gold is that a few years ago we noticed a lot of policy papers being written at various central banks and the way things sort of work is the wonks in the basement
Speaker: write about something and then it slowly goes up to someone that can pull the trigger.
Speaker: So we'd recognized that a lot of the mines at work and central banks were publishing papers that were pro-gold and so we thought it would just be a matter of time before they started to buy.
Speaker: So that continues to be one of the most interesting things that the policy wonks, as you say, at central banks are writing about, or are there some other topics on the agenda too?
Speaker: Well, I don't recall anything very recent, so I think a lot of it's been done.
Speaker: But what I would say is that
Speaker: When they sold, when central banks sold, they also sold for geopolitical reasons.
Speaker: They sold from 1991 to about 2008.
Speaker: And the reasons for that was the end of the Cold War.
Speaker: Central banks in Western Europe had built up enormous amounts.
Speaker: You see, in the case of a war, you don't know whose currency is redeemable, but you can use gold.
Speaker: So if NATO hadn't won...
Speaker: a world war.
Speaker: Central banks would have had gold to use.
Speaker: And when the gold war was officially ended by the first Bush and Gorbachev, we saw an avalanche of selling three months later in 1991, which lasted right up for more than 15 years.
Speaker: So that they're buying now, I think we could look for possibly multi-decade purchases.
Speaker: They don't do things for one or two years and then stop.
Speaker: Interesting, Jim.
Speaker: So getting back to where we are now, what do you think will happen to the gold price?
Speaker: Well, I think the market might be a little overstretched up here.
Speaker: We have to remember, first of all, that a lot of bull markets come to an end because of a deterioration underlying physical demand.
Speaker: And we pointed out how expensive gold is now for jewelry, for coins, for bars.
Speaker: Also, a lot of people have bought bars and coins.
Speaker: Secondly, there's been a contraction in expectations of Fed rate cuts.
Speaker: Now, in January, we were expecting, the street was expecting 150, 160 basis points of cuts and the gold market rallied.
Speaker: Well, that's since been pared back to around 25 basis points of cuts, which is HSBC's expectations also.
Speaker: And yet the gold market hasn't come down.
Speaker: Now, over time, I think real rates will eventually weigh on the gold market.
Speaker: If we got a stock market correction...
Speaker: one would presumably not need to keep buying gold in case of a stock market correction because it would already have occurred.
Speaker: Very often gold goes down with stock market correction because investors liquidate.
Speaker: And also I think it's an important point to bear in mind that the US dollar we still think is going to be firm.
Speaker: It's come down in the last few days, but overall going to be firm this year and probably next.
Speaker: And that self should weigh on gold.
Speaker: So it strikes me that the gold market's gotten a little bit ahead of itself and we could see, you know, a couple of hundred dollars lower by the end of the year.
Speaker: But still, as you pointed out earlier, you know, above $2,000.
Speaker: Jim, thank you so much for the update.
Speaker: Thank you.
Speaker: Pleasure.
Speaker: Here's a quick roundup of some of the other things we've been paying attention to this week in global research.
Speaker: The latest PMI data have been released and show signs of cautious optimism with the global composite PMI rising to its best reading since June 2023.
Speaker: The increase was primarily driven by a faster rise in service sector output, which offset the mild moderation in the manufacturing sector.
Speaker: Asian economies outperformed, particularly India, and mainland China also saw accelerated growth in its manufacturing sector.
Speaker: On the monetary policy front, the Bank of England kept interest rates on hold at its meeting on Thursday.
Speaker: Meanwhile, Sweden's Riksbank became the second G10 central bank to start its easing cycle, taking its policy rate from 4% to 3.75%.
Speaker: And don't forget that our next Live Insights is taking place on Thursday, the 23rd of May, where Mark McDonald will be answering your questions on the outlook for venture capital, private equity and high growth sectors such as tech and healthcare.
Speaker: If you'd like more details, then please email us at askresearch at hsbc.com.
Speaker: So that's it from us.
Speaker: Thanks very much for listening to the Macro Brief.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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