George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors joined Keith Black, Managing Director at RIA Channel, to discuss the gold market.
Milling-Stanley notes that, over the last 50 years, the annual appreciation of the gold price has averaged about 7.7%.1 Even though gold prices were relatively flat in 2021 and 2022, current developments are in line with long-term trends, with returns of 18% in 2019, 25% in 2020 and 11% through November 2023.2 The flat performance of gold was welcomed by investors seeking refuge from the strong declines in stock and bond prices in 2022.
Looking ahead to 2024, shifting monetary policy led by the Fed, an economic slowdown, and elevated volatility may create a positive environment for gold. Additionally, growing demand from fundamental factors exogenous to macroeconomic variables should continue to support gold.
The supply and demand picture remains strong for gold. On the supply side, mine production varies just 1-2% per year3, which has little impact on the price. Recycling of gold occurs when the price of gold is strong in emerging markets currencies. With gold prices over $2,000 per ounce a number of times recently, those looking to sell may already have done so.
The demand picture for gold focuses on the jewelry market, comprising 50% of annual consumption. Global jewelry sales were very weak in 2020 and 2021 due to COVID. This has been followed by a muted rebound in jewelry demand in 2022-2023.4 Investors need to watch the health of consumers in China, India, and other emerging markets to gauge the future trend of jewelry demand. Geopolitical tensions keep investor anxiety high, which can drive demand for gold. The US Dollar hit a 20-year high in 2022, but other currencies are now strengthening slowly relative to the dollar, which can ease the local currency price of gold and increase demand.5
Milling-Stanley looks to gold for protection against inflation, equity weakness, and weakness in the US dollar, as well as a hedge against geopolitical events. Over time, gold may help enhance the returns of a balanced portfolio over time while reducing risk. Portfolios may benefit from an allocation to gold of 2% to 10%, and an even higher allocation may be warranted during times of financial market turbulence.6
There are a variety of ways to get exposure to the gold market, including futures and options, coins and bullion, gold stocks, and funds holding physical gold. About half of the determinants of return to gold stocks come from the price of gold, while other factors are related to the stock market and developments within the individual companies. Investing in physical gold can be expensive when accessed through a coin or bullion dealer. Exchange traded funds holding physical gold are a popular way for investors to quickly and easily access the gold market.
Additional Sources:
2024 Gold Outlook: Can Turning Macro Tides Spur New Gold Highs? (ssga.com)
Talking Gold (ssga.com)
Gold Chart Pack (ssga.com)
Gold ETF Impact Study 2023 (ssga.com)
What’s Driving Central Banks to Record Gold Purchases — and Will It Last? (ssga.com)
2 Bloomberg Finance, L.P., State Street Global Advisors. Data as of November 30, 2023. Gold spot price posted full year returns of -3.6% and -0.3% in 2021 and 2022 respectively.
3 World Gold Council, State Street Gold Advisors. Data as of September 30, 2023.
4 World Gold Council, State Street Gold Advisors. Data as of September 30, 2023.
5 Bloomberg Finance L.P., State Street Global Advisors. Data as of November 30, 2023.
6 Source: State Street Global Advisors, “Invest in Gold: A Portfolio Diversifier With Staying Power“. As of 9/30/2023.
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