It is often posited that consumers tend to be price takers rather than price makers. In the short-term, this may be the case. However, gold jewellery and technology combined make up more than 40% of annual demand.
As such, gold consumers play an important role in supporting, and sometimes slowing down – performance. And they usually respond to two key factors: price and income. In this case, the sharp upward trend in the gold price has dampened demand in some markets such as India and China.
But positive economic growth can counteract some of this effect. In addition, possible gold price stability can lure back consumers who often respond more negatively to volatility than the level of the gold price.
This may be particularly relevant for India, where expectations of economic growth are higher than other regions and gold’s role as a store of value is well cemented.
Our analysis showcases gold’s likely reaction to the underlying conditions behind market consensus, as well as alternative hypothetical scenarios. While there appear to be many moving parts, Qaurum allows us to paint a clearer picture of these interactions.
In summary, gold may remain range bound if current market expectations prevail. However, there’s a clear path for gold to outperform from here, likely fuelled by Western flows. Conversely, in the event that central bank demand drops drastically, rates remain high for longer and Asian investor sentiment flips, we could see a pullback in the second half.
Overall, the extent of gold’s reaction upwards or downwards will be a function of the magnitude by which each of the aforementioned factors – or a combination thereof – move.
It is also important to note that each of these scenarios has implications for other asset classes. A robust asset allocation strategy must take into account not just market consensus but alternative views. And in that context, our analysis shows that gold plays a key role as a diversifier and source of liquidity, coupled with its positive long-term returns.
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