Central banks continue gold pivot: Franklin Templeton

New analysis from Franklin Templeton has confirmed the surge in gold’s price has been fuelled by both investor and central bank demand, now up by 32 per cent this year and hitting US$2,739.50 per ounce this week.

Andrew Canobi, Director of Franklin Templeton Fixed Income, noted that the demand for gold was being driven by retail investors, soaring exchange traded fund (ETF) flows, investor speculation, and central bank pivots.

“For much of history, gold served as the anchor for the international monetary system. However, in 1971, the US suspended the gold standard, transitioning to a system of free-floating fiat currencies,” he said.

“Interestingly, the shift initially saw the price of gold run up to $175, but the period of the ‘great moderation’ from the early 90s to the GFC was characterised by low stable inflation and positive GDP growth.

“[Central bank movements] catches our eye as the data is indicative of where reserve dollars are flowing. Central banks are increasingly diverting their reserves away from US dollars into gold, particularly in emerging markets such as Russia, India, Turkey, and China.

“This movement away from the US dollar towards gold is reflected in recent IMF data showing that the US dollar’s share of global foreign exchange reserves has fallen to a 29-year low of around 58% as of Q2 2024. While we are not predicting de-dollarisation or the imminent decline of the US dollar, the growing demand for gold is significant.”

Canobi also said that gold had performed at a time of high interest rates as an inflation hedge, despite the fact that it doesn’t pay interest.

“Gold’s strength in these conditions is remarkable, particularly given that positive real interest rates should theoretically present a headwind for gold, except real interest rates are bubbling along well above long-term averages. This matters for the bond market as global US dollar foreign exchange reserves are typically invested into treasuries.”

“We recommend keeping a close watch on the gold price as central bank activity and global economic shifts continue. We see little value in 10-year government bonds – be they Australian or US – given the latter largely drive the former. There will be episodic opportunities to add duration in the long end, but our advice would be to stay cautious.”