Gold: ETF demand to the rescue!

Gold has proved quite resilient to the rise in US real rates and could maintain its attractions over the medium term.

Since the US 10-year real rate reached a trough on 8 March 2022, gold has lost roughly 5% of its value. While this may seem a disappointing performance, it is actually much less so in view of the massive rise in US 10-year real rates since then (+93bps) and the decline in global risk aversion.

The main reason for gold’s relative resilience stems from the rise in investment demand, especially ETF demand. Since March, ETFs have purchased around 100 tonnes of gold, indicating that investment demand remains strong amid a desire to build a hedge against inflation and market risk is behind the latest increase in investment demand for gold.

The war in Ukraine and harsh new lockdowns in China to deal with covid outbreaks may keep inflationary pressure high due to sustained commodity and global supply-chain disruption, therefore supporting gold. Although inflation may soon peak, it could stay comparatively high, helping gold prices, especially in the short term.

That said, resilient global risk appetite and the recent highs reached by gold have led to some reduction in demand on futures markets. Such demand is particularly volatile and tends to be driven by short-term considerations (interest rose significantly at the beginning of the year and started to decline a week after Russia invaded Ukraine).

However, the decline in speculative interest for gold (i.e. futures) in recent weeks has been offset by the rise in interest from more strategic investors (i.e. ETFs), which could make gold more resistant to any short-term shift in sentiment.

Overall, persistently high inflation as well as growing concerns of a policy mistake by the US Federal Reserve explain the recent sharp rise in strategic interest in gold and therefore its resilience to higher rates. In the medium term, gold looks more attractive as the upside in US rates looks limited in our view, while inflation may stabilise at a higher level than in the last decade.

Our three-month projection for gold stands at USD1,870, our six-month projection at USD1,790 and our 12-month projection at USD1,850 per troy ounce.

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