Amid strong growth in the economy, a relatively stable gold price and the effective containment of the COVID-19 pandemic, China’s gold jewellery demand in the first half of 2021 totalled 338t.
This year marks 50 years since the end of gold’s formal link to currency. In the half-century that has passed since this milestone, the world has evolved in ways that were probably unimaginable to the political and economic leaders of that time. As the world has changed, so too has the role of gold. Whereas central banks steadily sold down their gold reserves for several decades after the end of the Bretton Woods system, they have since re-emerged as net buyers of gold for the past eleven years, with emerging market countries leading the way.
Gold fell in September by 4% to around US$1,743/oz. This was the second consecutive month of declines, with gold now over 8% lower y-t-d. Gold wasn’t alone. Treasuries, Corporates, US- and non-US equities all fell in September possibly as a result of deleveraging. The Q2 level of margin debt for equities was at a record high. It would be understandable if some leverage has been removed as we head into the historically volatile month of October. And it’s quite possible that this de-leveraging has affected most assets (energy and industrial metals excepted).
Over the past two months, economic growth has disappointed even as inflation has exceeded expectations. A real risk of stagflation, with rising costs amid lower growth, appears to be on the cards.
Q3 gold demand down 7% to 831t
ETF outflows outweighed continued recovery in other sectors
Gold rose slightly in October, despite a risk-on environment and increases in short-term bond yields
Together with our partners at OMFIF, we have written a report on the development of central bank digital currencies (CBDCs) and the implications for the gold market. CBDCs can potentially enable a wide range of new features. Money can become programmable, allowing policymakers to incentivise certain spending behaviours that can optimise economic impact or address social concerns. The trackable nature of CBDCs can also help to deter financial crimes. The ability to easily deploy “helicopter money” may also spark concerns about inflation.
Gold rose 2% in November based on the LBMA reference price, rallying early in the month before giving up most of those gains in the following weeks.
The shift to risker and less liquid assets strengthens the case for an allocation to gold, given its unique combination as a highly liquid, low-volatility asset.
Gold may face similar dynamics in 2022 than those from last year as competing forces support and curtail its performance.