2024-04-23 16:14:29
When gold prices crossed the $2,400 per troy ounce (31.1 gram) mark and reached an all-time high, it was not news. Records are constantly being attacked by this commodity. Another thing is the speed with which the price has soared. Back in January, it hovered slightly above two thousand dollars per ounce. But it soon got to where it should have been, according to the forecast of most investment analysts, only at the end of this year.
It has its justification. Gold is considered a safe haven in troubled times. Although it does not bring such a return as, for example, shares or other financial instruments, on the other hand, its price is not highly correlated with them. It holds its value even when other assets fall.
“The rise in the price of gold certainly reacts to the growth of geopolitical risks. Its jump in October after the start of the war in Gaza was striking, and it was even a more pronounced reaction of gold than at the start of other wars in the last 30 years. Private investors and some central banks rationally perceive that geopolitical risks were underestimated until recently, which is why they add gold to their portfolios,” says Pavel Ryska, J&T Bank analyst.
It is the central banks that are driving current growth. Last year, for the second year running, they bought over 1,000 tons of gold, which is a record and twice the pace of purchases than was common in the past.
According to educated guesses, these purchases are likely to continue this year and that some investors are increasing their gold holdings. “For some central banks, gold is once again becoming a strategic asset, as the risk of devaluation of the dollar and euro, which they usually hold, has increased significantly over the past two years, and the geopolitical risk is also growing,” adds Ryska.
So it’s not so much the risk of bank failures or household caution as the fear of major military conflicts and upheavals on the political scene. “The price of gold accurately describes the feelings perceived by the market. This is mainly the gradating geopolitical situation of Russia-Ukraine, Israel-Hamas-Iran. The expected interest rate adjustments and the approaching presidential election in the USA, where Donald Trump’s victory would drive out gold significantly up,” adds Jaroslav Tupý, an analyst at Purple Trading.
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The Czech Republic is copying the world with a delay
China was the biggest buyer last year. According to data from the World Gold Council, it bought 224.9 tonnes. He has been increasing his stock for 17 months. “The Chinese central bank is particularly active, and one of the hypotheses says that it is a preparation for a possible sanction in the form of freezing dollar and euro foreign exchange reserves, should it decide to invade Taiwan,” explains Česká spořitelna analyst Michal Skořepa.
In second place is Poland, which expanded its gold reserves by 130 tons. And the Czech National Bank has also been one of the biggest gold buyers in the world in recent years. Even as a member of the bank board, Governor Aleš Michl stated that he wanted to achieve that the bank had at least 100 tons of gold in its portfolio. Last March it was about 13.5 tons of gold, now at the end of last month it is already 35.68 tons.
“In general, I consider the diversification of central banks’ foreign exchange reserves by holding gold to be rational,” says Ryska. He points out that over the past three years, price stability has been significantly more fragile than most economists thought, and the risk of central bank reserve depreciation is higher. “Due to its limited supply, gold is significantly more immune to the loss of purchasing power,” adds the J&T analyst.
Even between 1989 and 2008, central banks were net sellers of gold and thus represented an important part of the global supply. On average, it was about 400 tons per year. “Since the big financial crisis in 2008 and 2009, on the other hand, central banks have started buying gold for their reserves again,” points out Pavel Ryba from the Golden Gate company.
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The behavior of the CNB copied this trend in the 1990s, when it got rid of gold, kept only a few tons and bought additional gold only for minting coins. The change was only brought about by the new governor, who took office in July 2022. “The CNB sold almost all monetary gold at a ridiculous price and never had its own official opinion. I appreciate its current turn in monetary reserve policy, but it was not an original and pioneering idea. It just started copying others,” claims former banker Bohumil Studýnka, co-author of the book Gold, gold, gold – From magic to financial speculation.
Finlord company analyst Boris Tomčiak considers the CNB’s policy correct, but it is necessary to perceive the context. “It must be said that the CNB made a profit last year mainly thanks to equity investments,” he points out.
Gold isn’t a stock, but it’s still worth it
In any case, the inclination towards gold is global. “If we look at the biggest buyers, we perceive a geopolitical shift from the dollar to gold. Due to high post-pandemic debts, trust in paper currencies may also decrease. And debts are solved by inflation in the long term. At the same time, gold to a large extent was and still is cheap,” adds Jiří Tyleček , analyst at XTB. For a calmer geopolitical development, he attaches greater importance to bonds.
But that is not the current situation. “I believe that the rise in the price of gold is only at the beginning. In the horizon of three to four years, I think we can expect the price of gold to be 3,000 to 3,200 dollars per troy ounce. It could fall if the geopolitical situation calms down, including the war in Ukraine and will significantly strengthen the US dollar,” says Tupý. According to Pavel Ryba, the price of the yellow metal will increase by at least 40 percent: “When the rates start to fall, gold will experience very strong years. Its price can easily increase more than twice.”
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The rise in gold prices would thus compensate for inflation in the Czech Republic. This is confirmed by Jaroslav Černý, head of communications at Česká mincovna. “We are witnessing another major jump correction upwards, when it is more than likely that the price of gold per ounce will not look back below 2000 dollars,” he told the Economist.
Ryba adds that gold appreciated by 39 percent in major world currencies, and by 33 percent in crown terms. Cumulative inflation for the same period reached 33.4 percent in the Czech Republic.
However, ordinary customers are now buying less physical gold. According to Černý, the demand of small investors for the investment form of physical gold in the form of bars or ingots and purely investment forms of coins in this year’s first quarter lags behind that of 2023 by more than a quarter. “One of the significant reasons is certainly the rising price of gold on the stock exchange and in crowns,” explains Černý.
The decline in gold bullion and coin sales was even more significant across the European market. According to World Gold Council statistics, it was 59 percent last year, and even more than 70 percent in Germany and Austria.
Photo: Economy
The reasons for the decline are higher interest rates, which have made savings in savings accounts a more competitive option for saving money. At the same time, mortgage payments increased and inflation increased household living costs. This leaves people with less money. “In the long term, the highest appreciation is generated by real estate and stock investments. But gold has the advantage of uncorrelated returns. Therefore, buying at the highs can make sense precisely for investors who want to diversify their portfolio outside of stocks,” concludes Tomčiak.
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