Gold and the Macro Environment: Insights from Michael Haigh

What are the hottest commodities on everyone’s minds this year? 

Generally speaking, all precious metals, but mainly gold and silver. Gold has reached historic highs, not just in nominal terms but also in real terms and most investors think it has a lot farther to go. Silver is outperforming gold, but the market is 10 times smaller and so it moves much more with pressure from buying (as well as selling). The silver market has more industrial applications than gold and has been in a deficit for three years so industry participants are scrambling to access the metal in such short supply so it probably will rise faster and further than gold.

What has shaken the world and made investors turn to gold?

Firstly,  uncertainty. “Normal” uncertainty index levels are around 100. In the GFC it reached 600, which is the same level we saw with the imposition of tariffs around liberation day. It is now at 300, three times normal levels. The elevated uncertainty means gold is an attractive asset and ETF flows have been huge as result, which has pushed up the price of gold as many ETF’s hold physical gold. It is hard to imagine a scenario in the foreseeable future where uncertainty normalises.

What is the other reason?  

De-dollarisation. Central banks are rethinking gold’s role in their reserves — and many are adding significantly. If the largest central banks, that hold less than 15% of their total reserves shifted 1% of non-gold assets into gold that would mean the top twenty banks would buy almost 700 tonnes of gold. Banks have paused buying gold for now, but we believe the buying will pick up again, pushing gold to $5,000 an ounce by this time next year.