When thinking about Gold it is easy to fall into the trap of comparing it to currencies. However, this is a fundamentally flawed way of thinking. In reality, the value of Gold never changes. All that changes is the value of all the currencies relative to the price of Gold. Now, these move at different rates, but nonetheless all move together as a group in relation to Gold which remains static. As such, the price of Gold never goes ‘up’, rather certain currencies depreciate at a faster rate against it. The rate of this depreciation is not only influenced by the relative strength of the currencies, but also external factors such as gold reserves, jewellery demand and market volatility.

Why is this so important? Because this is how central bankers think about Gold, and by understanding how they view the asset class, it is possible to contextualise their decisions. We have recently seen that central bank purchases of gold are the strongest in the past 25 years. This is an important nod towards the nature of risk-free status and towards a fraying of trust between sovereigns. According to the World Gold Council, central banks’ gold purchases have reached 673 tonnes in 2022 alone – the highest level since 1967. Some of the largest buyers of the metal were the central banks of India, Qatar and Uzbekistan, alongside some undisclosed buyers who evidently felt that reporting these purchases would be market sensitive.

So, why are central banks across the world buying so much Gold? There are two primary reasons. Firstly, market and geopolitical volatility have pushed many central banks to increase stockpiles of Gold, famously seen as a safe-haven asset during periods of economic turmoil. Secondly, it is often seen as a good long-term hedge against inflation, and with high levels of inflation persisting, many central banks are storing their wealth in Gold rather than cash. Gold has historically been seen as the ultimate form of ‘risk-free’ money – measuring the performance of fiat currencies.
Outlook 2023: Think like a central banker
We now appear to be entering a new era characterised by deglobalisation and multipolar power structures. The monetary landscape has become characterised around the world by sharply rising interest rates, runaway inflation, and looming recessions. In this new era, we are at the margin already seeing a reversal to the traditional view of gold – as a risk-free store of value and even as a non-political payment mechanism. The most recent example of this was Ghana’s recent announcement of its intention to use Gold rather than US Dollars to buy oil, however the trend of De-dollarisation is spreading and pivots around the important and changing relationship between raw materials, Gold and Dollars.
The era of minimal trust
What has changed in 2022 to spark this massive demand for Gold? The main driver has been a loss of trust in institutions and sovereigns. The beauty of Gold is that it doesn’t require trust, unlike government-issued money. Due to its non-political nature and limited supply, it has always been the consensus choice of a multipolar world, and this is where we are once again heading, albeit through a storm of short-term macro and geopolitical volatility.

Although the dollar has gathered strength in 2022, this has mostly been driven by central bank guidance and policy. The US will have to reverse their hawkish policy action and guidance at some point due to the ongoing record issuance and lack of buyers and liquidity in the treasury market. Currently, the Fed is adamant that they will continue their regime of interest rate hikes until inflation falls to an acceptable level. However, it is only a matter of time until they are forced to reverse their current policy. When this happens, dollar real interest rates will weaken, creating a supportive environment for monetary metals in US Dollar terms, matching strength we have already seen in Gold expressed in other currencies.

The value of active minds: independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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