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Gold to glisten despite world’s economic concerns

A woman checks her jewellery in Mumbai. The UAE’s top gold export market is India Reuters/Francis Mascarenhas
A woman checks her jewellery in Mumbai. The UAE’s top gold export market is India
  • Prices hit record highs
  • Good news for UAE
  • India remains main market

Central bank demand helped lift gold prices to all-time highs this month and further accumulation should support the precious metal next year despite a likely slowdown in the global economy, a top industry official has told AGBI.

Gold’s performance is important to the United Arab Emirates. The country is a major processor and the world’s third largest import and export market for physical gold after the UK and Switzerland.

Prices were flat on Thursday, with spot gold trading at $2,025.69 per ounce by 0516 GMT, while US gold futures were down 0.3 percent to $2,042.50. The precious metal hit an all-time peak of $2,135 on Monday.

Central banks have been net buyers of gold since 2010, said Andrew Naylor, head of Middle East and public policy at the World Gold Council (WGC) in Dubai.

“Over the last couple of years that’s really accelerated,” he said, noting central banks’ accumulation of gold is partly due to efforts to reduce the proportion of US dollars in their reserves.

Gold is usually inversely correlated to the dollar, although the dollar index – which measures the greenback against a basket of six major currencies – is near-flat this year.

Purchasing by central banks has added at least 10 percent to its price this year, according to a WGC report published on December 7.

As investors, the banks embrace its safe-haven reputation as gold is an easily tradable physical asset that has price upside potential and no credit risk, Naylor said.

Institutions, however, usually buy gold through exchange-traded funds (ETFs), rather than physical gold. Collective holdings of gold ETFs had fallen 7 percent this year to November 30, council data shows, as high interest rates spur them to put their money elsewhere.

Investors only profit from increases in its price, unlike bondholders for example, who also receive interest.

Prices could increase 4 percent in 2024 should the yields on longer-maturing debt decline, the WGC report predicts.

In terms of the global economic outlook, Naylor believes the most likely scenario is for a so-called soft landing, where GDP growth weakens but there is no recession.

When that has happened before, gold prices have been “fairly flat” or “slightly negative”, said Naylor. Yet strong central bank demand and geopolitical strife could push gold’s price higher despite US economic stutters, he said.

The failure of Silicon Valley Bank and the Israel-Hamas conflict boosted demand, the report states, estimating geopolitical worries raised prices for the precious metal by 3-6 percent in 2023.

Next year, there will be elections in the United States, India and elsewhere, so “investors’ need for portfolio hedges are likely to be higher than normal”, the report states.

“Gold isn’t strongly correlated to many other assets – and that’s one of the reasons for holding it,” Naylor said. “There are procyclical and countercyclical elements.”

As an example, institutional investors increase gold buying during times of economic strife, while demand from jewellery makers rises when GDP growth is strong because consumers have greater disposable income.

Andrew Naylor, head of Middle East and public policy at the World Gold CouncilWorld Gold Council
Andrew Naylor, head of Middle East and public policy at the World Gold Council

Jewellery accounts for about 40 percent of gold demand, technology 7 percent, central banks about 18 percent and the remainder is from non-sovereign investors, Naylor said.

The UAE’s top gold export market is India, whose importers make it into jewellery. India is second only to China in terms of consumer demand for physical gold.

Naylor forecasts UAE gold exports to India will increase, although the metal will face competition from other financial assets as the subcontinent’s middle classes expands.

“We’d still expect gold to play a major role in (Indian) household finances because of the cultural and historical affinity (to it),” Naylor said.

High prices tend to dampen Indian consumer demand for gold jewellery, although that is not the case at the moment, said Naylor. He predicts Dubai will remain a major supplier – thanks in part to the UAE-India trade agreement, which came into force in May 2022.

The council estimates UAE domestic gold consumption as a 55-tonne annual market – mostly to make jewellery, although investments in bars and coins are increasing.

“That might be a growth area for the UAE in particular,” Naylor said. “You could see high net worth individuals, for example, potentially storing gold here like they do in Singapore.”

Supplies come from the mining and recycling of existing gold. General inflation and rising energy costs have increased mining production costs to an average of $1,300 per ounce.

Above-ground gold stocks total about 200,000 tonnes, which if purified would make a cube just 23 metres along each plane.

A little under half of this stock is in jewellery, about one-quarter in privately held gold coins and bars, and the remainder in technology or central bank reserves, Naylor said. Proven reserves are about 55,000 tonnes.

Mined supply increases by about 1.5-2.0 percent annually. This meets about two-thirds of annual global demand, with recycling providing the remainder.

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