Recent address to a gold industry group

My background has been embedded in the precious metal space since the early 1980’s and I’ve witnessed all sorts of craziness over that period which has fuelled both bull markets and bear markets. I can say without fear of contradiction that we are in a bull market right now. 

When a commodity enters unchartered territory as gold has done this year, it becomes very difficult to predict what happens next. Whilst it looks like the gold price is unstoppable right now, we have to remember the old adage that trees don’t grow to the sky. There will be level that the market will run out of steam and either stabilise or pull back. 

Where gold peaks is not as relevant as where it finds its new equilibrium and that is far more difficult to predict, but one approach would be to understand what has driven prices to this unchartered territory and look at how similar scenarios in the past played out. 

There is a general consensus that the gold market will continue higher for the remainder of this year and next year, with targets generally in a 3,000 to 4,000 usd per ounce range, with some outliers looking for significantly higher prices over the next 18 months. Very few are predicting the market to start trending lower from here.

Many of the big names in bullion are citing tariffs, sustained geopolitical risk, slower growth and the threat of higher inflation as reasons why gold is outperforming with more upside likely. 

Additionally, the current rate of central bank buying and a general move amongst some of the biggest institutional wealth managers to diversify away from USD assets are also being seen as a catalyst for further growth in the next 12 to 18 months.

The gold price has been on the rise for 20 years now with a steeper upward trajectory for the last 2 years, but the real exponential rise has occurred since the beginning of this year, taking us from $2600 in January to peak at just shy of $3500 earlier this month. 

The fundamentals are clearly showing that demand is outstripping supply at the moment and the sentiment for holding gold is extremely positive right now for the reasons discussed.

Having spent a large part of my career working on reserve asset management in the official sector I see this activity as the principal indicator for what is in store for gold.

Volumes of gold being bought by central banks is at levels that haven’t been seen since the Bretton Woods system was formally disbanded in 1971. For the last 3 years central bank purchases have exceeded 1000 tons per annum and 2025 is forecast to be higher still. 

So, looking at that parallel, from the 1960’s and 70’s, despite the firm linkage between currencies and gold being removed, there was a flurry of activity from central banks to buy gold which was broadly thought to be as a result of a lack of confidence in the USD. 

It was still a relatively new concept to have one’s own monetary system pegged to another country’s currency and there was clearly concern that the US at that time, was running excessive debt, caused in part by an expensive military operation in Vietnam. So, with absence of any national stabilisation policies in place, there was an expectation that USD devaluation was inevitable which prompted many countries to minimise losses from a devaluation by buying gold. 

Does any of this sound familiar?

Gold prices in actual terms traded up from its fixed price of $35 per ounce in 1967 to peak at around $800 in 1980. Interestingly, if we adjust those numbers for inflation we see a price of $300 per ounce trading up to $2,700 which starts to make current prices look a little more logical. 

High global interest rates and a strong dollar will always provide headwinds for gold, because gold is a non yielding asset and obviously if the dollar is strong vs consuming countries then the price in local currency for the big demand centres is higher, relatively speaking, which in normal times will dampen demand. So the fact that gold has rallied so much despite those 2 headwinds still being in place gives me assurances that gold has not found its equilibrium yetand this also suggests to me that we are experiencing extraordinary times at the moment.

Recent decisions made by the US government (including the tariff fiasco) clearly indicate that they want to devalue the USD for the sake of the American domestic economy and with such a huge deficit, they cannot afford for interest rates to go any higher which to my mind tells me that the demand for gold is going to continue to grow in the years ahead as those headwinds dissipate.

All that said, gold is unique in a class of its own, being both a commodity and a financial asset and in nearly all cases extreme volatility doesn’t serve the industry well.

I’ve worked closely with the official sector for 30 years now, which means I’ve seen how gold reserves have been managed in times of crisis and I can tell you that central banks don’t want gold to be in the news, because that implies fundamental problems in the world. An example being in 2008 when financial institutions started toppling, central banks put a raft of sell orders in the gold market to keep the price from making the headlines.

So whilst the banks that mark their gold reserves to market are enjoying huge gains, they will also be uncomfortable with the disruptive price action that we are seeing now.  

One hot topic that is getting a lot of press at the moment is whether gold should be given HQLA status (High Quality Liquid Asset) under Basel 3 rules. That clarity would help financial institutions to grow their gold franchises in paper and derivative gold products but I can say with confidence that this is not likely to be approved while the level of demand for gold is already a problem. That would be akin to throwing gasoline on the fire.

So in conclusion, it is difficult to imagine the huge positive momentum that has built up in recent years turning any time soon, so I think prices will remain high and that dips will be bought and all sectors of the gold industry will have to adjust their business models to this new equilibrium which is likely to be above $3000 per ounce going forward.

Thank you for allowing me to share my thoughts with you and to reiterate once more, these are my own views and opinions. I’m not sure whether I am comforted or concerned that I’m simply joining a very large crowd with this stance, but I can say one thing for sure, from a personal perspective I have found that I sleep better knowing that I have gold in my portfolio.